After tense weeks-long political negotiations and rising anxiety about the catastrophic possibilities of a default, the United States Senate has approved a bill to suspend the government’s $31.4 trillion debt ceiling until January 1, 2025. The U.S. Treasury Department had warned that it would be unable to pay all its bills on June 5 if Congress failed to act.
The bill’s passage on June 1 came after a protracted standoff between Republicans, who demanded spending cuts, and Democrats, who opposed any attempt to tie spending cuts to raising the debt ceiling.
Debt ceilings have long been a topic of interest and debate in the realm of economic policy as these statutory limits on the government’s debt amount have far-reaching implications for a country’s fiscal management.
In the U.S., the debt ceiling has often been a contentious issue, leading to political showdowns and economic uncertainty – as we have just experienced once again in the past few months.
However, the U.S. is not alone in implementing such a measure—Denmark, a country known for its robust welfare system and prudent fiscal policies, also has a debt ceiling in place.
Understanding the Debt Ceiling
A debt ceiling is a legal limit imposed on the total amount of debt a government can issue to finance its operations.
This limit is typically set by legislation and serves as a mechanism to control government spending, borrowing, and overall debt levels.
The objective is to ensure responsible fiscal management and prevent excessive debt accumulation.
Denmark’s Model
While Denmark is a significantly smaller country compared to the U.S., it also maintains a debt ceiling as part of its fiscal framework.
However, Denmark’s debt ceiling differs significantly in its structure and political implications– it functions as an advisory measure rather than a strict legal limit.
It’s set by the Ministry of Finance, taking into account various economic factors such as GDP growth, interest rates, and financial stability.
Unlike the U.S., where the debt ceiling is a subject of intense political debate, Denmark’s debt ceiling tends to be more technical and rarely triggers political standoffs.
The Danish limit primarily serves as a guideline for fiscal policy, signaling a level at which the government should exercise caution in incurring debt.
While not legally binding, the debt ceiling plays a crucial role in promoting transparency, discipline, and long-term fiscal sustainability.
It also encourages policymakers to consider the long-term consequences of excessive borrowing and promotes responsible fiscal decision-making.
Modes of Implementation
Another significant difference between the U.S. and Denmark’s debt ceiling systems lies in how it’s managed and executed.
In the U.S., the debt ceiling must be raised explicitly through legislation which often involves contentious debates and requires a supermajority in Congress to pass.
In contrast, Denmark’s debt ceiling does not require legislative action to be adjusted—it’s reviewed and adjusted annually by the Ministry of Finance in consultation with economic experts.
Additionally, the U.S. debt ceiling is an all-encompassing limit on total debt, covering both public debts held by external investors and intra-governmental debt.
Compare that to the Danish debt ceiling, which focuses solely on public debt, excluding intra-governmental debt.
This exclusion allows for greater flexibility in managing government finances and reduces the risk of reaching the debt ceiling prematurely.
Key Differences: Partisanship vs. Transparency
- Design and Purpose: Denmark’s debt ceiling was designed to be a synthetic constitutional provision and was set so high that it would never become a “political bargaining chip.” The U.S. debt ceiling has become a political tool used by lawmakers to negotiate spending and tax policies.
- Level of Debt: Denmark borrows far less compared with the size of its economy, with a debt-to-GDP ratio of 37% in 2021. Compare that to the U.S., which has a debt-to-GDP ratio of over 100%. This makes Denmark less likely to run into problems with the ceiling, regardless of the level at which it’s set.
- Political Differences: While the U.S. has a clearer separation of powers, often leading to gridlock between the executive and legislative branches, Denmark has a parliamentary system that allows for more cooperation between the government and opposition parties. The Danish debt ceiling was implemented in 1993 as a constitutional necessity following a structural overhaul of its government.
Denmark by the Numbers
The upper limit for borrowing was set at 950 billion Danish kroner ($140 billion), significantly above government debt levels at the time.
Denmark has historically retained a strong fiscal position but suffered a significant deficit in the wake of the 2008 financial crisis.
The ceiling was only lifted once when it doubled in 2010 following the 2008 financial crisis.
The Danish state debt is projected to increase, to about US$180 billion, however, with the debt ceiling currently set at the equivalent of US$304 billion, the debt ceiling is unlikely to be reached.
For a small country, the Danish threshold set at DKK 2 trillion ($284bn, £237.7bn), is relatively high and means there’s scope to take out state loans without repeatedly hitting it.
However, the government ended 2022 with a budget surplus and used the money to pay down a large chunk of its borrowing.
Denmark’s debt has generally been shrinking, and the government has implemented policies aimed at making sure that the economic situation is sustainable in the long term.
Compliance with EU Law
As part of the European Union, Denmark must conform to additional directives that the U.S. does not have—the EU asks member states to limit debt to 60% of GDP.
Denmark has undertaken, through the Maastricht Treaty, to keep its debt under 60% of GDP.
Using EU figures, which also include municipal debts, the Danish debt was estimated to be 45% of GDP in 2020.
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 caused by the Covid-19 pandemic.
While both systems have their pros and cons, they reflect each country’s unique political, economic, and cultural contexts.
Absent controversy and political showdowns, Denmark’s debt ceiling system operates as a more technical advisory measure, which reflects its strong commitment to long-term fiscal sustainability and its emphasis on transparency and prudent economic management.
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The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
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