Congress will need to increase the statutory debt limit in the coming year.
Based on projected borrowing needs, the federal government is likely to reach the $41.1 trillion debt limit by May 2027. The U.S. Department of the Treasury would be able to temporarily meet federal obligations for several months beyond this date by using incoming receipts, existing cash on hand, and extraordinary measures. Those fiscal resources are likely to be exhausted by February 2028; this hard deadline is referred to as the X-Date. Congress will likely need to increase the debt limit by January 1, 2028, to preserve a prudent buffer of fiscal resources so it can pay its bills on time.
Reaching the debt limit should be a wake-up call.
Congress should responsibly increase the debt limit before the Treasury loses the ability to make federal payments on time. But lawmakers should pair that debt limit increase with meaningful reforms to slow the growth of federal spending and put the budget on a more sustainable trajectory.
The High Debt Reflects a Larger Fiscal Problem
The federal government is forced to issue large amounts of debt because spending consistently exceeds revenues. The Congressional Budget Office (CBO) now projects the deficit will total $2.1 trillion in fiscal year 2026. Its February baseline projects the deficit will rise to $3.1 trillion by 2036.
Federal debt held by the public now exceeds the size of the entire U.S. economy. As a percentage of gross domestic product (GDP), the debt is larger than any time since World War II.
The federal budget is on an unsustainable trajectory because government spending is growing faster than the economy. The CBO projects that outlays will be 23.3% of GDP in FY 2026, well above the 50-year historical average of 21.2%. Without reform, spending is projected to continue rising as a share of the economy.
Meanwhile, CBO’s February baseline projected revenues at 17.5% of GDP in FY 2026, slightly higher than the 50-year historical average of 17.3%. Revenues are projected to rise to 17.8% of GDP by 2036.
The federal government’s sovereign credit rating has been downgraded by each of the three major credit rating agencies since 2011. In explaining the downgrades, the agencies cited high and rising debt, persistent deficits, and weaknesses in the federal fiscal policymaking process to address these problems.
U.S. Government Loses the Highest Credit Ratings Because It Lacks a Plan to Deal with the Unsustainable Debt | ||
Agency | Current U.S. Sovereign Debt Credit Rating | Downgrade Year |
Fitch | AA+ | 2023 |
Moody’s | Aa1 | 2025 |
Standard & Poor’s | AA+ | 2011 |
Sources: Fitch, Moody’s, S&P | ||
All three of the downgrades occurred after or during debates about the debt limit. The downgrades did not happen simply because Congress debated what to do about the debt limit. Rather, the agencies felt that the deficit reduction plans that resulted from these debates fell short of what was necessary to put the budget on a sustainable path. This should be a signal that Congress needs to get serious and address the drivers of the deficit.
Protect the Integrity of U.S. Debt
Policymakers must always defend the integrity of the United States’ debt by insisting on fiscal discipline.
The commitment to repaying the government’s debt, coupled with America’s vibrant economy, has allowed debt issued by the U.S. Treasury to be considered the global safe asset for the last eight decades. This special status provides important economic benefits. Investors pay for the perceived safety by accepting a lower interest rate on U.S. Treasury debt, known as the convenience yield. However, as the government’s fiscal condition deteriorates and the supply of debt rises relative to demand, the convenience yield has eroded, pushing interest rates higher.
Protecting the creditworthiness of the U.S. Government means that the debt limit should be responsibly increased so the Treasury can pay its bills on time, but it also requires addressing the fiscal trajectory responsible for the continued accumulation of debt.
Pair the Debt Limit Increase with Fiscal Reforms
Debt limit legislation has historically provided an opportunity for Congress and the President to enact broader fiscal reforms. Major deficit reduction agreements over the last four decades have often been associated with debt limit legislation.
The Debt Limit Has Served as a Catalyst to Address the Deficit | |
Year | Debt Limit and Deficit Reduction Legislation |
1985 | Balanced Budget and Emergency Deficit Control Act |
1990 | Budget Enforcement Act |
1993 | Omnibus Budget Reconciliation Act |
1997 | Budget Enforcement Act |
2011 | Budget Control Act |
2023 | Fiscal Responsibility Act |
Sources: CRS, Manhattan Institute | |
The One Big Beautiful Bill Act also paired its $5 trillion debt-limit increase with reforms intended to slow the growth of federal spending by $1.6 trillion.
The upcoming debt limit increase should be paired with reforms that reduce spending, including by addressing waste, fraud, and abuse.
Increase the Debt Limit to a Specific Dollar Amount, Not a Suspension
When Congress addresses the debt limit, it should ensure that it is increased to a specific dollar level.
In recent years, Congress has frequently suspended the statutory limit for specified time periods rather than increasing it to a dollar amount. Debt limit suspensions are irresponsible policy.
Debt limit suspensions allow the Treasury to run up an unrestrained amount of debt.
It can also permit the Treasury to substantially increase its cash on hand balance before the suspension expires. Large changes in the Treasury’s cash balance can have implications for liquidity in the financial system and the Federal Reserve’s independence.
A specific dollar limit provides Congress and the public with a clearer measure of how much additional borrowing authority lawmakers have approved.
Do Not Eliminate the Debt Limit
Congress should also reject proposals to eliminate the statutory debt limit.
The debt limit is an important tool to protect taxpayers. While the debt limit itself does not determine the level of federal spending or debt, the requirement to periodically reconsider additional borrowing authority provides lawmakers with an important inflection point to examine the underlying fiscal policies producing additional debt.
Eliminating the debt limit could increase the likelihood of a fiscal crisis because it would send a signal to the financial markets that U.S. fiscal policy will be unconstrained and more likely to engage in unsustainable spending.
Conclusion
Congress will likely need to increase the $41.1 trillion national debt limit by January 2028.
The debt limit will likely be hit by May 2027. However, the Treasury will be able to use incoming revenues, existing cash on hand, and extraordinary measures to make required payments for the next several months. Congress should act by January 2028, before the projected February X-Date, while the Treasury retains a prudent buffer of available resources.
Reaching the debt limit should be a wake-up call. When confronting the debt limit, Congress should:
- Protect the integrity of U.S. debt. Congress should responsibly increase the debt limit, while insisting on fiscal discipline.
- Pair the debt limit increase with meaningful reforms. The debt limit has historically facilitated spending and deficit reduction. The debt limit should be paired with reforms that reduce spending, including by addressing waste, fraud, and abuse.
- Increase the debt limit to a specific dollar amount. Do not suspend the debt limit for a period of time.
- Not eliminate the debt limit. The debt limit is an important tool to protect taxpayers.