# 2011 U.S. Debt Ceiling Crisis: Meaning and Outcome

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> **Definition**
>
> The 2011 U.S. Debt Ceiling Crisis was a contentious debate in Congress that occurred in July 2011 regarding the maximum amount of debt that the federal government should be allowed.

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

To resolve the 2011 U.S. Debt Ceiling Crisis over the amount of the national debt, Congress passed the Budget Control Act of 2011. This was one of a series of recurrent debates over increasing the total size of the U.S. national debt.  

### Key Takeaways

*   In 2008, the federal budget deficit stood at $458.6 billion, which widened to $1.4 trillion the following year as the government spent heavily to boost the economy.
*   Congress passed a law to resolve the crisis that increased the debt ceiling by $2.4 trillion.
*   As a result of the crisis, the United States’ credit rating was reduced from AAA to AA+ by Standard & Poor’s.
*   The 2011 debt ceiling crisis had implications for future debt ceiling discussions.

## How the 2011 U.S. Debt Ceiling Crisis Unfolded

The federal government has rarely achieved a balanced budget, and its [budget deficit](https://www.investopedia.com/terms/b/budget-deficit.asp) ballooned following the [2007–08 financial crisis](https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp). In the 2008 fiscal year, the deficit stood at $458.6 billion, widening to $1.4 trillion in 2009 as the government engaged in a massive [fiscal policy](https://www.investopedia.com/terms/f/fiscalpolicy.asp) response to the economic downturn.

From 2008 to 2010, Congress raised the [debt ceiling](https://www.investopedia.com/terms/d/debt-ceiling.asp) from $10.6 trillion to $14.3 trillion. In 2011, as the [economy](https://www.investopedia.com/terms/e/economy.asp) 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.

A 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](https://www.investopedia.com/terms/s/socialsecurity.asp) and [Medicare](https://www.investopedia.com/terms/m/medicare.asp) recipients, government employees, and government contractors.

Moreover, they asserted that the [Treasury](https://www.investopedia.com/terms/u/ustreasury.asp) could suspend interest [payments on existing debt](https://www.investopedia.com/terms/t/trillion-dollar-coin.asp) 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](https://www.investopedia.com/terms/d/default2.asp) 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.

> **Important**
>
> The U.S. has raised the debt limit 78 times since 1960. Most recently, it raised the debt limit in 2023.

## Outcome of the 2011 U.S. Debt Ceiling Crisis

Congress resolved the debt ceiling crisis by passing the [Budget Control Act of 2011](https://www.investopedia.com/terms/b/budget-control-act.asp), which became law on Aug. 2, 2011. This act allowed the debt ceiling to be raised by $2.4 trillion in two phases, or installments.

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 $1.2 trillion to $1.5 trillion, subject to congressional disapproval as well.

In return, the law included $900 billion in slowdowns in planned spending increases over a 10-year period. It also established a special committee charged with finding at least $1.5 trillion in additional savings.

In effect, the legislation incrementally raised the debt ceiling from $14.3 trillion to $16.4 trillion by Jan. 27, 2012.

Following the passage of the act, [Standard & Poor’s (S&P)](https://www.investopedia.com/terms/s/sp.asp) 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 S&P report says, “The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the (Obama) Administration recently agreed to fall short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.” 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.

## 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 wartime military spending, which would be repaid after the end of hostilities. This kept the national debt directly linked to authorized spending.

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. 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](https://www.investopedia.com/terms/c/credit.asp). 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.

## Longer-Term Implications of 2011 Debt Ceiling Crisis

The American economy, politics, and financial markets were all affected in the long run by the country’s 2011 debt limit issue. As mentioned before, Standard & Poor’s downgraded the United States’ credit rating for the first time ever (from AAA to AA+). This resulted in several longer-term implications.

First, the protracted debt ceiling talks and brinkmanship had an adverse effect on consumer and corporate confidence. On Aug. 8, 2011, the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp) dropped 79.2 points while the [Nasdaq Composite Index](https://www.investopedia.com/terms/n/nasdaqcompositeindex.asp) dropped 174.72 points. Each of those two indexes lost over 6.6% of its value that day, with the [Dow Jones Industrial Average (DJIA)](https://www.investopedia.com/terms/d/djia.asp) dropping 634 points, or 5.55%.

Concerns about the long-term viability of U.S. government debt were raised as a result of the debt limit crisis’s failure to address the underlying fiscal issues. The nation’s fiscal stability and long-term economic prospects may be impacted by the unsolved concerns around budget deficits and the national debt. Most recently, the U.S. Senate has increased the debt ceiling limit to $31.4 trillion.

The debt limit issue and the ensuing credit rating cut had some effect on the [U.S. dollar](https://www.investopedia.com/terms/forex/u/usd-united-states-dollar.asp). Even while there may not have been much of an immediate impact, it prompted concerns about the strength and stability of the dollar in the long run.

The debt limit debate also sparked talks about possible adjustments to both the budgetary procedures and the debt ceiling mechanism. Measures have been taken to prevent similar crises in the future, such as changes to the budgeting schedule and discussions about prospective changes to the debt cap structure.  

## What Could Happen If Congress Does Not Vote to Raise the Debt Ceiling?

According to U.S. Treasury Secretary [Janet Yellen](https://www.investopedia.com/articles/investing/101613/janet-yellen-background-and-philosophy.asp), failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihood of all Americans, and global financial stability. She also mentioned that the U.S. would risk facing another credit rating downgrade, similar to that of 2011.

## Once the Debt Ceiling Is Reached, What Spending Will Be Cut?

In a letter to the U.S. House of Representatives, Yellen warned congressional leaders that the Treasury would implement extraordinary measures to prevent the U.S. from defaulting on its obligations. In the past, the Treasury has suspended new investments in the [Civil Service Retirement](https://www.investopedia.com/terms/c/csrs.asp) and Disability Fund and the Postal Service Retiree Health Benefits Fund. It also suspended reinvestment of the [Government Securities](https://www.investopedia.com/terms/g/governmentsecurity.asp) Investment Fund of the Federal Employees Retirement System [Thrift Savings Plan](https://www.investopedia.com/ask/answers/102714/thrift-savings-plan-tsp-qualified-retirement-plan.asp). Keep in mind that every debt ceiling debate cycle is unique and may be resolved using unique measures.

## Why Did Increasing the Debt Ceiling Cause Contentious Debate in 2011?

From 2008 to 2010, Congress raised the debt ceiling from $10.6 trillion to $14.3 trillion. In 2011, as the economy showed early signs of recovery and federal debt approached its limit again, negotiations began in Congress to decide spending priorities.

A heated debate ensued between pro-debt politicians and fiscal conservatives. Pro-debt politicians argued that failing to raise the limit could result in late, partial, or missed payments to Social Security and Medicare recipients, government employees, and government contractors. Fiscal conservatives argued that any debt limit increase should come with limits on federal spending and debt accumulation.

## The Bottom Line

Following the 2007–08 Financial Crisis, in an effort to slow down the [Great Recession](https://www.investopedia.com/terms/g/great-recession.asp) as well as the persistently high [unemployment rate](https://www.investopedia.com/terms/u/unemploymentrate.asp), the U.S. government increased federal spending. As a result, the federal debt reached its limit on multiple occasions from 2008 to 2011, which led to a series of increases in the debt limit. In 2011, the Treasury asked for its borrowing capacity to be extended.

The 2011 U.S. Debt Ceiling Crisis was a contentious debate in Congress that occurred in July 2011 regarding the maximum amount of debt that the federal government should be allowed. Congress resolved the debt ceiling crisis by passing the Budget Control Act of 2011, which became law on Aug. 2, 2011. This act allowed the debt ceiling to be raised by $2.4 trillion in two phases, or installments.

> **Article Sources**
>
> 1.  The White House, Office of Management and Budget. “[Historical Tables](https://www.whitehouse.gov/wp-content/uploads/2020/02/hist_fy21.pdf),” Page 28.
>     
> 2.  House Budget Committee Democrats. “[Summary of the Budget Control Act of 2011](https://democrats-budget.house.gov/committee-report/summary-budget-control-act-2011).”
>     
> 3.  U.S. Government Accountability Office. “[Debt Limit: Analysis of 2011–2012 Actions Taken and Effect of Delayed Increase on Borrowing Costs](https://www.gao.gov/products/gao-12-701).”
>     
> 4.  FactCheck.org. “[Debt Limit Q&A](https://www.factcheck.org/2021/09/debt-limit-qa/).”
>     
> 5.  Reuters. “[Biden Signs Debt Limit Bill, Avoiding U.S. Default](https://www.reuters.com/world/us/biden-signs-bill-lifting-us-debt-limit-2023-06-03/).”
>     
> 6.  Congress.gov, U.S. Congress. “[S.365—Budget Control Act of 2011](https://www.congress.gov/bill/112th-congress/senate-bill/365?q=%7B%22search%22%3A%5B%22cite%3APL112-25%22%5D%7D&s=1&r=1).”
>     
> 7.  Standard & Poor’s, via The Washington Post. “[Research Update: United States of America Long-Term Rating Lowered to ‘AA+’ on Political Risks and Rising Debt Burden; Outlook Negative](https://www.washingtonpost.com/wp-srv/politics/documents/spratingreport_080611.pdf).”
>     
> 8.  Congressional Research Service, via Federation of American Scientists, Project on Government Secrecy. “[The Debt Limit Since 2011](https://fas.org/sgp/crs/misc/R43389.pdf),” Page 1 (Page 5 of PDF).
>     
> 9.  Investors Signals. “[Black Monday 2011, Revisited](https://www.investorsignals.com/2017/08/14/black-monday-2011-revisited/).”
>     
> 10.  Congress.gov, U.S. Congress. “[S.2168—No Default Act](https://www.congress.gov/bill/118th-congress/senate-bill/2168).”
>      
> 11.  U.S. Department of the Treasury. “[Debt Limit Letter to Congress 1/13/2023](https://home.treasury.gov/system/files/136/Debt-Limit-Letter-to-Congress-McCarthy-20230113.pdf?).”