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

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

This just isn’t the primary time the formerly procedural mechanism has caused turmoil in Washington. Yet in Denmark — the one other democracy with the same style of nominal debt ceiling — barely anybody knows it exists.

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

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

The U.S. will default on its bills for the primary time ever, if Democrats and Republicans are unable to interrupt the impasse by June 1. This may likely have serious economic ramifications, including a recession, mass federal job losses and a world stock market collapse.

The debt ceiling has been in effect since 1917 and enables Congress to limit the amount of cash the federal government is capable of borrow to cover its bills, making up the deficit between what it collects in taxes and spends on government activities already approved by Congress.

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

Once routine, discussions over raising the debt ceiling have increasingly grow to be a platform for political brinkmanship — particularly since 2011, when Republicans also threatened a default if the Obama administration didn’t grant spending cuts.

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

The limit was raised unconditionally by the Democratic-led House thrice under former Republican President Donald Trump’s administration, but history is now repeating itself.

Separation of church and state

While the U.S. debt ceiling restricts government borrowing to a selected figure, most other economies set debt limits as a percentage of GDP.

For example, countries which are a part of the European Union, under rules set out within the Maastricht Treaty, pledge to maintain their public debt below 60% of GDP and to take care of an annual budget deficit of lower than 3%.

Denmark is the one other democratic nation on the earth with a debt limit set at a set nominal figure, yet it never produces the identical political and economic turmoil. The truth is, it’s scarcely even talked about.

This is basically since the Danish debt ceiling was designed to be an artificial constitutional provision and was set so high that it could never grow to be the “political bargaining chip” it has within the U.S., as government borrowing needs repeatedly run up against it, based on Laura Sunder-Plassmann, associate professor of economics on the University of Copenhagen.

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

“While there are definitely arguments to be made for fiscal rules, most advanced countries have opted for non-binding limits on debt to GDP ratios (and deficits) as a substitute of nominal amounts, which while perhaps not perfect at the least avoids the sort of debates we now see within the U.S.,” she said via email.

The Danish debt ceiling, or “gældsloft,” was implemented as a constitutional requirement in 1993 after a restructure of the country’s government, and set at 950 billion Danish kroner ($137.5 billion). Danish politicians consider it more of an artificial formality, largely in place to reassure parliament and the general public that the federal government of the day cannot go rogue.

Denmark has historically retained a powerful fiscal position, but suffered a big deficit within the wake of the 2008 financial crisis, prompting the debt ceiling to be increased in 2010 to 2 trillion Danish kroner.

It is a hefty limit for a small country of around 6 million individuals with a national debt of just 323 billion kroner at the tip of 2022, based on the Danish National Bank.

Denmark is running a budget surplus and has seen its debt fall substantially over the past decade. National debt to GDP declined steadily up until a spike in 2020 brought on by the Covid-19 pandemic and fell again to simply over 30% of GDP by late 2022.

Jesper Rangvid, professor of finance on the Copenhagen Business School, told CNBC on Tuesday that the Danish system is structured in order that political decisions about fiscal policy are confined to the general public budget for tax and spending of every year, with the debt ceiling a completely separate formality.

“It’s simply not discussed on this country since it’s just not a difficulty, and that’s, after all, as a consequence of this factor that there was all of those surpluses for a few years on the federal government budget, and due to this fact debt has actually been falling for a few years,” he explained via telephone from Copenhagen.

“We now have the political discussion once we choose expenditures and taxes and so forth, and the debt limit shouldn’t be restricting that, which is after all very different to the U.S., where you each have the annual discussions on the budget, on expenditures and incomes, and since you always have deficits, then you definitely even have the discussions on the debt limit.”

Rangvid added that, while Danish politicians across the country’s plethora of political parties have a really broad spectrum of views on fiscal policy, the important thing difference is that the forum for discussing them is confined to the annual budget. Other functions of presidency due to this fact can’t be held hostage by the fiscal demands of opposition parties.