What Is the 2011 U.S. Debt Ceiling Crisis?

The 2011 U.S. Debt Ceiling Crisis was a contentious debate

in Congress that occurred in July 2011 regarding the maximum amount of
borrowing the federal government should be allowed to undertake.

KEY TAKEAWAYS

 The 2011 U.S. Debt Ceiling Crisis was one of a series of recurrent
debates over increasing the total size of the U.S. national debt.
 The crisis was brought about by massive increases in federal
spending following the Great Recession.
 In 2008, the federal budget deficit stood at $458.6 billon, which
widened to $1.4 trillion the following year as the government spent
heavily to boost the economy.1
 To resolve the crisis, Congress passed a law that increased the debt
ceiling by $2.4 trillion.2
Understanding the 2011 U.S. Debt Ceiling Crisis
The federal government has rarely achieved a balanced budget and
its budget deficit ballooned following the 2007-08 Financial Crisis and
the Great Recession. In the 2008 fiscal year, the deficit stood at $458.6
billon, widening to $1.4 trillion in 2009 as the government engaged in a
massive fiscal policy response to the economic downturn.1

Between 2008 and 2010, Congress raised the debt ceiling from $10.6

trillion to $14.3 trillion.3 Then in 2011, as the economy showed early signs
of recovery and federal debt approached its limit once again, negotiations
began in Congress to balance spending priorities against the ever-rising
debt burden. 

Heated debate ensued, pitting proponents of spending and debt against

fiscal conservatives. Pro-debt politicians argued that failing to raise the limit
would require immediate cuts to spending already authorized by Congress,
which could result in late, partial, or missed payments to Social
Security and Medicare recipients, government employees, and government
contractors.

Moreover, they asserted the Treasury could suspend interest payments on

existing debt rather than withhold funds committed to federal programs.
The prospect of cutting back on already promised spending was labeled a
crisis by debt proponents. On the other hand, the specter of a
technical default on existing Treasury debt roiled financial markets. Fiscal
conservatives argued that any debt limit increase should come with
constraints on the growth of federal spending and debt accumulation.

Outcome of the 2011 U.S. Debt Ceiling Crisis

Congress resolved the debt ceiling crisis by passing the Budget Control Act
of 2011, which became law on August 2, 2011. 4 This act allowed the debt
ceiling to be raised by $2.4 trillion in two phases. In the first phase, a $400
billion increase would occur immediately, followed by another $500 billion
unless Congress disapproved it. The second phase allowed for an increase
of between $1.2 trillion and $1.5 trillion, also subject to Congressional
disapproval. In return, the act included $900 billion in slowdowns in planned
spending increases over a 10-year period and established a special
committee to discuss additional spending cuts. 2

In effect, the legislation raised the debt ceiling from $14.3 trillion to $16.4
trillion by January 27, 2012.3

Following the passage of the act, Standard and Poor's took the radical step
of downgrading the United States long-term credit rating from AAA to AA+,
even though the U.S. did not default. The credit rating agency cited the
unimpressive size of deficit reduction plans relative to the likely future
prospects for politically driven spending and debt accumulation. 5

Debt Approval Process Leading to the 2011 U.S. Debt Ceiling Crisis
The U.S. Constitution gives Congress the power to borrow money. Before
1917, this power was exercised by Congress authorizing the Treasury to
borrow specified amounts of debt to fund limited expenses, such as war-
time military spending that would be repaid after the end of hostilities. This
kept the national debt directly linked to authorized spending. 6

In 1917, Congress imposed a limit on federal debt as well as individual

issuance limits. In 1939, Congress gave the Treasury more flexibility in how
it managed the overall structure of federal debt, giving it an aggregate limit
to work within.6 However, by delegating debt management authority to the
Treasury, Congress was able to break the direct connection between
authorized spending and the debt that finances it. 

While allowing greater flexibility to raise spending, this practice also created
a need for Congress to repeatedly raise the debt limit when spending
threatens to overrun available credit. Due to occasional political resistance
to the idea of continually expanding the federal debt, this process of raising
the debt limit has at times engendered controversy, which occurred during
the 2011 Debt Ceiling Crisis.