The US is not the only country with a debt ceiling.Here’s How Denmark Avoids Drama

U.S. President Joe Biden chairs debt limit talks with U.S. House Speaker Kevin McCarthy (R-CA) in the Oval Office of the White House in Washington, U.S., May 22, 2023. REUTERS/Leah Millis

Leah Millis | Reuters

The standoff between the White House and congressional Republicans 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 that previous procedural mechanisms have caused turmoil in Washington. Yet in Denmark — the only democracy with a similar nominal debt ceiling — almost no one knows it exists.

President Joe Biden and Republican House Speaker Kevin McCarthy held what the White House called a “productive” meeting on Monday, but struggled to reach an agreement.

The Republican-led House wants sweeping cuts to federal discretionary spending, new job requirements for welfare recipients and expanded mining and fossil fuel production. So far, the White House has resisted.

If Democrats and Republicans fail to break the deadlock by June 1, the US will default for the first time. could have serious economic consequencesincluding a recession, massive federal unemployment, and a global stock market crash.

The debt ceiling, in effect since 1917, allows Congress to limit the amount of money the federal government can borrow to pay its bills, covering the deficit between its tax collection and spending on government activities Congress has approved.

It has been lifted 78 times since 1960, the last time it increased by $2.5 trillion to $31.381 trillion in December 2021.

U.S. debt ceiling talks: Economists say base case is they've 'sealed something'

The once routine discussion of raising the debt ceiling has increasingly become a platform for political brinkmanship — especially since 2011, when Republicans also threatened to default if the Obama administration did not approve spending cuts.

The incident prompted S&P Global to downgrade the U.S. credit rating for the first time, while Senate Minority Leader Mitch McConnell said at the time that the debt ceiling – and the U.S. economy – were “a hostage worth redeeming.”

The Democratic-led House raised the limit three times under former Republican President Donald Trump, but history is repeating itself.

separation of church and state

While the U.S. debt ceiling limits government borrowing to a specific number, most other economies set debt ceilings as a percentage of GDP.

For example, EU member states, under the terms of the Maastricht Treaty, pledged to keep their public debt below 60% of GDP and to keep their annual budget deficits below 3%.

Denmark, the only democracy in the world with a fixed debt ceiling set at a nominal figure, has never produced the same political and economic turmoil. In fact, it’s rarely even talked about.

Markets haven't fully priced in risk of U.S. debt default, analysts say

This is largely because Denmark’s debt ceiling was designed as a synthetic constitutional clause and set so high that it would never become the “political bargaining chip” it had in the US, as the government’s borrowing needs were repeatedly tied to contend, 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 in the United States, with two large parties in parliament and a dozen or more smaller, but not insignificant, parties.

“While there is certainly debate over fiscal rules, most developed countries have opted for non-binding limits on debt-to-GDP ratios (and deficits) rather than nominal amounts, which may not be perfect but at least avoids the The kind of debate we’re seeing in the U.S. now,” she said by email.

Denmark’s debt ceiling, or “gældsloft”, was implemented as a constitutional requirement following the country’s government reshuffle in 1993 and was set at DKK 950 billion ($137.5 billion). Danish politicians see this more as a form of synthesis, mainly to reassure parliament and the public that today’s government will not become a rogue.

COPENHAGEN, DENMARK – FEBRUARY 28, 2023: Members of the Danish Parliament attend a session before voting. Denmark is the only country in the world with a debt ceiling comparable to that of the United States, but it has never sparked the political crises Washington often faces.

LISELOTTE SABROE/Ritzau Scanpix/AFP via Getty Images

Denmark has historically maintained a strong fiscal position, but ran large deficits following the 2008 financial crisis, prompting the debt ceiling to be raised to DKK 2 trillion in 2010.

That’s a high ceiling for a small country of about 6 million people with a national debt of just 323 billion kroner by the end of 2022, according to the Danish National Bank.

Denmark has a budget surplus and its debt has fallen sharply over the past decade. The national debt fell steadily as a share of GDP until it spiked in 2020 due to the Covid-19 pandemic, falling again to above 30% of GDP by the end of 2022.

Jesper Rangvid, a professor of finance at Copenhagen Business School, told CNBC on Tuesday that the structure of the Danish system is such that political decisions about fiscal policy are limited to the annual public budget of taxes and spending, with the debt ceiling entirely separate procedure.

Relief rally likely near X date, says investment strategist

“The country isn’t talking about it at all because it’s not a problem at all, and of course, because of this factor, the government budget has been running all these surpluses for years, so the debt has actually been going down for many years,” he explained by phone from Copenhagen.

“When we decide things like spending and taxes, we have a political discussion, the debt ceiling shouldn’t limit that, it’s of course very different from the US where you have discussions every year about budget, spending and revenue, and because you often have deficits , so you also have discussions about the debt ceiling.”

Rangvid added that while politicians from Denmark’s political parties have very broad views on fiscal policy, the main difference is that the forum for discussing these views is limited to the annual budget. Therefore, other functions of the government cannot be subject to the financial demands of the opposition parties.

Source link

Leave a Comment