The U.S. isn’t the only country with a debt ceiling. Here’s how Denmark avoids the drama

The U.S. isn’t the only country with a debt ceiling. Here’s how Denmark avoids the drama

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

Leah Millis | Reuters

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 default.

It’s not the first time the previous procedural mechanism has caused an uproar in Washington. But in Denmark – the only other democracy with a similar nominal debt ceiling – hardly anyone knows it exists.

President Joe Biden and Republican House Speaker Kevin McCarthy held a meeting Monday at the White House, which the latter described as “productive,” but an agreement is still out of reach.

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

If Democrats and Republicans are unable to break the impasse by June 1, the US will default on its bills for the first time ever. This would likely have severe economic consequences, including a recession, massive federal job losses and a collapse in global stock markets.

The debt ceiling has been in effect since 1917 and allows Congress to limit the amount of money the federal government can borrow to pay its bills, making up the deficit between tax revenue and spending on government activities already authorized by Congress.

It has been raised 78 times since 1960, most recently by $2.5 trillion to $31.381 trillion in December 2021.

Once routine, discussions about raising the debt ceiling have increasingly become a platform for political risk manoeuvres—especially since 2011, when Republicans also threatened to default if the Obama administration didn’t grant spending cuts.

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

Under the administration of former Republican President Donald Trump, the Democratic-run House of Representatives raised the limit unconditionally three times, but now history is repeating itself.

separation of church and state

While the US debt ceiling limits government debt to a certain amount, most other economies set debt limits as a percentage of GDP.

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

Denmark is the only other democratic nation in the world that has a debt ceiling set at a fixed nominal amount, yet it never experiences the same political and economic turmoil. In fact, it is hardly talked about.

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This is largely because Denmark’s debt ceiling was designed as a synthetic constitutional provision and set so high that it would never become the “political bargaining chip” that it has in the US, as the government’s borrowing needs keep bumping against it, says Laura Sunder-Plassmann, associate professor of economics at the University of Copenhagen.

Sunder-Plassmann also explained that Danish politics is politically less polarized than that of the US, with two large and a dozen or more smaller but not insignificant parties represented in parliament.

“While there are certainly arguments for fiscal rules, most advanced 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 kind of debates we have “Now see it in the US,” she said via email.

Denmark’s debt ceiling, or ‘gældsloft’, was introduced as a constitutional requirement in 1993 following a reorganization of the country’s government and was set at 950 billion Danish kroner ($137.5 billion). Danish politicians see it more as a formality, mainly to reassure parliament and the public that the government at the time cannot be unfaithful.

COPENHAGEN, Denmark – February 28, 2023: Members of the Danish Parliament attend a session before a vote. Denmark is the only other country in the world with a debt ceiling comparable to that of the US, but it never causes the same political crises that Washington frequently faces.

LISELOTTE SABROE/Ritzau Scanpix/AFP via Getty Images

Denmark has traditionally had a strong fiscal position, but suffered a sizeable deficit in the wake of the 2008 financial crisis, leading to the debt ceiling being raised to DKK 2 trillion in 2010.

According to the Danish National Bank, this is a high limit for a small country with around 6 million inhabitants and a national debt of just 323 billion kroner at the end of 2022.

Carl-Johan Dalgaard, an economics professor at the University of Copenhagen, told CNBC on Wednesday that most people in Denmark tend to forget about the hard ceiling, with the EU limit of 60% debt-to-GDP ratio attracting more attention.

Raising the debt ceiling in 2010 was uncontroversial, said Dalgaard, in part due to the less polarized nature of the Danish political landscape, including the “broad support of the Danish electorate for the welfare state” and the fact that raising the debt ceiling only led to that needed in the context of a global crisis.

The low national debt also means it is “not of significant importance” in times of economic stability, he added.

Denmark has a budget surplus and has seen its debt fall significantly over the past decade. The government debt-to-GDP ratio steadily declined until a surge in 2020 caused by the Covid-19 pandemic, and then fell back to just over 30% of GDP by the end of 2022.

Jesper Rangvid, a professor of finance at Copenhagen Business School, told CNBC on Tuesday that the Danish system is structured in such a way that political decisions about fiscal policy are limited to each year’s public budget for taxes and spending, with the debt ceiling completely formality is different.

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“It’s just not discussed in this country because it’s just not an issue, and of course that’s because there’s been all these surpluses in the state budget for many years and therefore the debt has actually been going down for many years,” he explained over the phone from Copenhagen.

“We have the political discussion when we decide about spending, taxes, etc. and the debt ceiling shouldn’t limit that, which of course is very different from the US, where you both have the annual discussions about the budget and spending.” and income, and because there are always deficits, then there are also discussions about the debt limit.”

Rangvid added that while Danish politicians have a very wide range of views on fiscal policy in the country’s multitude of political parties, the key difference is that the forum for their discussion is limited to the annual budget. Other government functions can therefore not be held hostage by the fiscal demands of the opposition parties.