Can a Debt Ceiling Be Sensible?—The Case of Denmark
The US debate about raising the debt ceiling has produced many references to the existence of similar “debt ceilings” in other countries—for example, Denmark, which has a fixed nominal debt limit legislatively outside the annual budget process1.
From a legal and legislative process point of view, the US and Danish debt ceilings are similar. Both countries in theory require legislative action to raise the ceiling. But crucial real world differences make them as different as tangy Danish Blue and bland Philadelphia cream cheese spread.
First, consider that the current nominal Danish debt ceiling is fixed at 2,000 billion Danish kroner (Dkr), or 115 percent of 2010 GDP. Meanwhile, outstanding gross general government debt in Denmark is Dkr691 billion, or just below 40 percent of GDP and just 34 percent of the actual debt ceiling limit for nominal gross debt2. In other words, the Danish debt ceiling is almost three times the level of actual outstanding gross debt and of no practical relevance for government budget making or debt management.
Moreover, when the debt ceiling was last raised in Denmark in 2010 from Dkr950 billion to the current Dkr2,000 billion, it was still almost 40 percent above outstanding government debt of Dkr 691 billion. The more than doubling of the debt ceiling to Dkr2,000 billion was carried out explicitly to avoid any potential effect of the nominal gross debt ceiling on ongoing fiscal policies in Denmark.
The desire of the majority of the Danish parliament was to avoid the nation’s legal debt ceiling being anything other than a legal formality.
The difference with the US debt ceiling, instituted by Congress principally as an excuse to enable members to politically grandstand and vent empty rhetoric about fiscal sustainability, could not be greater.
In short, the Danish example of a debt ceiling shows that the only debt ceilings that make any sense are those that do not have real effects on ongoing fiscal policy and budgeting.
The only sensible course for Congress to take is to do away with the US debt ceiling once and for all, or as in Denmark raise it so far above current outstanding debt that it loses any relevance for policymaking, and any power to be manipulated for political gain.
See also follow-up post "Can a Debt Ceiling Be Sensible? The Case of Denmark II."