The United States is not the only country with a debt ceiling. Here’s how Denmark avoids drama

A standoff between the White House and congressional Republicans over raising the US debt ceiling has pushed the world’s largest economy to the brink of defaulting on its bills.

This is not the first time the old procedural mechanism has caused a stir in Washington. Yet in Denmark – the only other democracy with a similar type of nominal debt ceiling – hardly anyone knows it exists.

President Joe Biden and Republican House Speaker Kevin McCarthy held what the latter called a “productive” meeting at the White House on Monday, but a deal remains elusive.

The Republican-led House wants sweeping cuts to discretionary federal spending, new work requirements for welfare recipients, and an expansion of mining and fossil fuel production. The White House has so far resisted.

The United States will default on its bills for the first time ever, if Democrats and Republicans fail to break the deadlock by June 1. This would likely have serious economic ramifications, including a recession, massive federal job losses, and a global stock market crash.

The debt ceiling has been in effect since 1917 and allows Congress to limit the amount of money the federal government can borrow to cover its bills, closing the gap between what it collects in taxes and spending on activities. already approved by Congress.

It has been raised 78 times since 1960, its last increase of $2.5 trillion in December 2021 to $31.381 trillion.

Once routine, discussions of raising the debt ceiling have increasingly become a platform for tight-rope politics – especially since 2011, when Republicans also threatened to default if the Obama administration did not grant reductions in expenditure.

The episode prompted S&P Global to issue a first-ever U.S. credit rating downgrade, while Senate Minority Leader Mitch McConnell said at the time that the debt ceiling — and by implication the US economy – was a “hostage worth ransoming”.

The limit was raised unconditionally by the Democratic-led House three times during the administration of former Republican President Donald Trump, but history is now repeating itself.

Separation of Church and State

While the US debt ceiling limits government borrowing to a particular figure, most other economies set debt limits as a percentage of GDP.

For example, countries that are part of the European Union, under the rules set out in the Maastricht Treaty, commit to keeping their public debt below 60% of GDP and to maintaining an annual budget deficit below 3 %.

Denmark is the only other democratic country in the world with a debt limit set at a fixed nominal figure, but it never produces the same political and economic turmoil. In fact, we hardly talk about it.

This is largely because the Danish debt ceiling was designed to be a synthetic constitutional provision and was set at such a high level that it would never become the “bargaining chip”. policy” available to it in the United States, as the government’s borrowing needs repeatedly clash with it, according to Laura Sunder-Plassmann, associate professor of economics at the University of Copenhagen.

Sunder-Plassmann also explained that Danish politics is less politically polarized than the United States, with two large and a dozen or more smaller but sizable parties represented in parliament.

“While there are certainly arguments to be made in favor of fiscal rules, most advanced countries have opted for soft limits on debt-to-GDP ratios (and deficits) instead of nominal amounts, which , while it may not be perfect, at least avoids the kind of debates we see now in the United States,” she said via email.

Denmark’s debt ceiling, or “gældsloft”, was put in place as a constitutional requirement in 1993 after a restructuring of the country’s government, and set at 950 billion Danish kroner ($137.5 billion). Danish politicians view it more as a synthetic formality, largely in place to reassure parliament and the public that the incumbent government cannot go rogue.

Denmark has historically maintained a strong fiscal position, but suffered from a large deficit following the 2008 financial crisis, which led to the debt ceiling being raised in 2010 to DKK 2 trillion.

This is a high limit for a small country of around 6 million people with a national debt of just 323 billion crowns at the end of 2022, according to the Danish National Bank.

Denmark runs a budget surplus and has seen its debt decline significantly over the past decade. National debt to GDP fell steadily until a peak in 2020 caused by the Covid-19 pandemic and fell back to just over 30% of GDP by the end of 2022.

Jesper Rangvid, professor of finance at Copenhagen Business School, told CNBC on Tuesday that the Danish system is structured so that political decisions on fiscal policy are confined to the public budget for taxes and spending each year. , the debt ceiling being entirely separate. formality.

“It’s just not discussed in this country because it’s just not a problem, and it is, of course, because of this factor that there have been all these surpluses for many years. on the government budget, and so the debt actually went down for many years,” he explained by phone from Copenhagen.

“We have the political discussion when we decide on spending and taxes and so on, and the debt limit shouldn’t restrict that, which of course is very different from the United States, where you both have discussions yearly on the budget, on expenses and income, and because you constantly have deficits, then you also have discussions on the debt limit.

Rangvid added that while Danish politicians from the country’s plethora of political parties have a very wide range of views on fiscal policy, the main difference is that the forum for discussing it is limited to the annual budget. Other functions of government therefore cannot be held hostage to the fiscal demands of opposition parties.