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Debt ceiling: Denmark has one, too. It’s never been a problem

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Debt ceiling: Denmark has one, too. It’s never been a problem


London
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The United States isn’t the only country that puts a limit on how much money its government is allowed to borrow. But it is the only nation regularly pushed to the brink of a political and economic crisis as a result.

President Joe Biden will host Republican House Speaker Kevin McCarthy and other congressional leaders at the White House on Tuesday for a critical meeting on raising the US debt ceiling. Treasury Secretary Janet Yellen has warned that if a deal isn’t reached soon, the United States could run out of cash to pay its bills as early as June 1.

That could mean the United States defaults on its debt, which economists have said would unleash a financial meltdown and a recession.

Stakes that high raise a question: Do other countries have this problem?

The answer is no. Few countries set formal limits on public borrowing needed to meet legal obligations, precisely because they can become tools of political brinkmanship, according to Mrugank Bhusari, an assistant director at the Atlantic Council, a think tank.

The only other advanced economy that limits borrowing in absolute terms is Denmark. But in the Scandinavian country, the ceiling is intentionally set high enough to avoid political dramas like the one playing out in Washington.

“It’s really rare for debt limits to pose genuine threats to economic stability in a country,” Bhusari said.

Congress first imposed a limit of $45 billion on overall US government borrowing in 1939. That was about 10% above total federal debt at the time.

Since then, the country’s economy has expanded substantially — as has its borrowing. US federal debt increased to $30.9 trillion in 2022 (from $870 billion in 1939, in current dollars). The ratio of general government debt to gross domestic product, or GDP, stood at about 128% in 2021, according to the International Monetary Fund.

That’s meant Congress has had to frequently step in. Since 1960, legislators have acted 78 times — on average more than once a year — to raise or modify the US debt limit so the government can continue to pay its bills.

It’s a problem unique to the United States. Countries that have opted for debt limits, with the goal of encouraging fiscal restraint, tend to structure them as a percentage of GDP instead of choosing a nominal value, according to Bhusari. They also allow for more flexibility, taking defaults off the table in the case of a breach.

Malaysia, Namibia and Pakistan are all in this camp, he said. The European Union asks member states to limit debt to 60% of GDP, though many consistently break that rule and it was suspended during the pandemic. It may yet be revised to spur spending on the green and digital transitions.

The closest analogue to the US debt ceiling is the set-up in Denmark. Yet lawmakers in Copenhagen don’t find themselves locked in perennial political confrontations.

When Denmark implemented a debt ceiling in 1993 — a constitutional necessity following a structural overhaul of its government — it was determined that the upper limit for borrowing should be 950 billion Danish kroner ($140 billion), significantly above government debt levels at the time.

Las Olsen, chief economist at Denmark’s Danske Bank, said this was a strategic decision. Lawmakers did not want the debt ceiling to become a proxy for difficult conversations about the government’s fiscal plans.

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“The logic is Parliament sets tax and spending, and once it does that, there’s no way around allowing the government to borrow the difference,” Olsen said.

Political leaders were also cognizant that as a small country, Denmark couldn’t afford to spook investors with regular political stand-offs.

The debt limit in Denmark has been increased only once. It was roughly doubled in 2010 to deal with the economic aftermath of the 2008 financial crisis. But the increase was ultimately unnecessary; borrowing stayed well below the cap.

“It’s not a political issue at all,” Olsen said. “It’s seen as a complete formality.”

There are limitations to comparing the United States and Denmark. The latter borrows far less compared with the size of its economy, with a debt-to-GDP ratio of 37% in 2021. It often runs budget surpluses.

That makes Denmark less likely to run into problems with the ceiling — regardless of the level at which it’s set.

“The country is so much more fiscally conservative in many ways than the United States,” said Jacob Funk Kirkegaard, a nonresident senior fellow at the Peterson Institute for International Economics, based in Washington, D.C. “It has far, far, far lower levels of debt.”

There are also major political differences. While the United States has a clearer separation of powers, often leading to gridlock between the executive and legislative branches, Denmark’s parliament elects the head of government, often on the basis of a coalition of parties. That makes it less likely the debt ceiling could be turned into a political football. There are also distinct processes for creating annual budgets.

Even so, it’s clear that in Denmark, the debt limit has enabled the smooth functioning of government, Kirkegaard said. In the United States, it’s had the opposite effect.

“We have to spend an awful lot of time on this at regular intervals,” Kirkegaard said. “All we’re doing is avoiding a disaster scenario we’re creating for ourselves.”

Bhusari of the Atlantic Council also described the US debt ceiling crisis as “entirely self-imposed.”

When it comes to tackling issues like debt sustainability, he said, investors “often think of [a ceiling] as more of a problem than a solution,” even if they prize fiscal caution. Most likely, the limit will just keep being raised.

He noted the example of Australia, which introduced a debt ceiling in 2008 to bolster its fiscal credentials, raised it multiple times, and ultimately ditched it in 2013 when it became a constant source of political friction.

The United States may be singular in its approach to debt management. But should the country default, it will become the world’s problem — at a time when high interest rates and inflation are already causing pain.

“No one fully knows what will happen and it poses a lot of uncertainty,” Bhusari said.

Financial markets are built on an understanding that owning US debt, or Treasuries, is safe. If the United States is unable to pay its creditors for an extended period, White House economists have predicted the value of the stock market could crater, and the country could suffer a deep recession, with the loss of more than 8 million jobs.

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