NewsWorldWhat Americans can learn from Denmark to deal with the debt ceiling crisis

What Americans can learn from Denmark to deal with the debt ceiling crisis

  • By Adrian Murray and Sam Cabral
  • BBC News, Copenhagen and Washington

April 19, 2023

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In Denmark, the debt ceiling is not a political issue

The high-profile drama of raising the US debt ceiling is back in the headlines. Is there a better way? Maybe Denmark has the answer.

The United States Congress is once again debating the nation’s debt ceiling, a limit on how much the government can borrow.

If the two main parties do not agree to raise the ceiling in the coming weeks, the United States could default on its debt for the first time in history.

Experts believe that a default would send shockwaves through global financial markets and spell disaster for the US economy.

But Republicans, who control the lower house of Congress, want spending cuts before they agree.

The cap was introduced more than a century ago and makes the United States an outlier globally.

Another industrialized country, Denmark, has a formal debt ceiling, but it is being managed without the drama and frenzy often seen in Washington.

In fact, the Danes’ debt ceiling is rarely talked about because it’s not even close to being exceeded.

Called “gældsloft” in Danish, it was introduced as a constitutional requirement in 1993.

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In 2011, there was a showdown over the debt ceiling between congressional Republicans and President Obama.

“The government can’t write a blank check,” said Los Olsen, chief economist at Danske Bank.

Although US and Danish laws look similar, they work differently.

«[Danish] Politicians consider it a formality. This is not a political issue,” Olson said.

“They are [parliament] They have already passed all the laws that require the spending and they have passed laws on how much tax to collect,” he added.

“So it would be a bit strange not to allow the government to borrow the difference.”

The Danish threshold is set at 2 trillion Danish kroner ($284 billion, £237.7 billion). For a relatively small country with relatively higher rates, there is an opportunity to get state loans without further repetition.

“The total amount of state debt at the moment is DKK 645 billion. So that’s a long way off,” Olsen said.

This ceiling was raised only once in 2010. It was widely supported by Danish political parties after the 2008 financial crisis.

“Suddenly the government had to borrow a huge amount of money in a short period of time to support the economy,” Olsen said.

By comparison, the US ceiling has been raised 78 separate times since 1960: 49 times under a Republican president and 29 times under a Democrat.

Danish politics is less polarized than in the United States, with more than a dozen different parties holding seats in parliament.

Olsson said that while Danish politicians often disagreed on what to spend the budget on, they mostly agreed on how to manage it.

“Broadly speaking, they agree with the framework, which is that funding should be sustainable and expenses should be paid for,” Olsen said. “It brings a different kind of political debate than what you see in America.”

A key way in which Denmark’s environment differs from the US is that, overall, its debt is coming down. The government ended 2022 with a budget surplus and used the cash to pay off a large part of its debt.

“There’s actually a lot of savings going on,” Olson explained. “It is a policy aimed at keeping the economy stable for a long time, knowing that there are many pensioners and that we will live longer.”

A simple guide to the debt ceiling

  • If government spending exceeds tax revenue, the government must borrow
  • After World War I, the US set a limit on that borrowing, the debt ceiling, which it raised when necessary through a vote in Congress, which was the norm.
  • Currently, Democrats control the Senate and Republicans run the House, so bipartisan votes are needed to raise the cap.
  • The United States has never defaulted on its debts, but experts say such a scenario would have devastating consequences for the world economy.

The US national debt has been rising since the early 1980s, when the government accumulated more debt than the US earned in any given year. It surpassed the size of the country’s GDP in 2013 and is now over $31 trillion (£26 trillion).

Many other countries choose a different method and view debt as a proportion of GDP. It shows how much debt a country has relative to the size of its economy and can give a better idea of ​​a country’s ability to service its debt.

In fact, EU member states agreed to keep debt below 60% of GDP, although not always in practice.

Denmark is unique in that it has a debt ceiling and is committed to the EU ceiling. “It’s a regulation that makes a lot of sense for governments,” Olson said.

What would it take for the United States to be Danish in its approach?

Separating politics from the fight over the US debt limit won’t happen anytime soon because it has become a partisan ritual, says Jacob Kirkegaard, a nonresident senior fellow at the Peterson Institute for International Economics.

He supports getting rid of the US debt ceiling, which he argues is more of a “nuisance” than a sensible tool for reining in government spending.

But he believes neither side risks doing that because they risk being accused of not caring about balancing the country’s books.

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