Lessons on debt ceiling from Denmark

Jacob Funk Kirkegaard of Peterson Institute points to debt ceiling lessons from Denmark.

Denmark too has a debt ceiling but is much higher than the public debt/GDP ratio. In US, debt ceiling is much closer to public debt/GDP ratio.  So there is no real chance of politicizing the event in Denmark as it has been the case in US.

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 below 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.

In US the debt ceiling is $14.29 tn and the public debt is just around $14.29 tn. Hence talks of revising it upwards. It would be higher than debt ceiling on 2 Aug, 2011 which is the deadline to revise the ceiling upwards.

So, solution is US should raise its debt ceiling much higher than debt ratio figure:

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.

This is right but a higher debt ceiling would not point how precarious the situation of US finance is. Say it was much higher at $ 25 tn how would people have figured the situation.

This higher debt ceiling might work in low debt countries. But countries with higher debt levels like US, we need some ways to ensure that high and growing debt figures are questioned. The debt ceiling is always very close to the debt figures but should not really be much higher. It acts as a good check actually.

To me. this whole politicisation of the raising debt ceiling process which is more worrisome. This gamesmanship between Democrats and Republicans over economic issues is a bigger worry.  It is something which has to be done and the way it is being delayed. I think there should be a change in rules which allows for an easier revision of the debt ceiling. It is just too political as of now….

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5 Responses to “Lessons on debt ceiling from Denmark”

  1. Patrick Takahashi: Cut the Defense Budget, Please! | The Almighty Dollar Says:

    [...] a century. While this masquerade is just another sign that our government must be broken, odd that only Denmark and the USA adhere to this practice, with the Danish wisely keeping their ceiling so high that it is never an [...]

  2. GoodPorkBadPork.com » Blog Archive » Patrick Takahashi: Cut the Defense Budget, Please! Says:

    [...] a century. While this masquerade is just another sign that our government must be broken, odd that only Denmark and the USA adhere to this practice, with the Danish wisely keeping their ceiling so high that it is never an [...]

  3. Patrick Takahashi: Cut the Defense Budget, Please! Says:

    [...] a century. While this masquerade is just another sign that our government must be broken, odd that only Denmark and the USA adhere to this practice, with the Danish wisely keeping their ceiling so high that it is never an [...]

  4. Patrick Takahashi: Cut the Defense Budget, Please! | Politimo - PoliticalParades.com Says:

    [...] a century. While this masquerade is just another sign that our government must be broken, odd that only Denmark and the USA adhere to this practice, with the Danish wisely keeping their ceiling so high that it is never an [...]

  5. Patrick Takahashi: Cut the Defense Budget, Please! | Finance Information - Mortgage, Debt, Credit Cards Says:

    [...] a century. While this masquerade is just another sign that our government must be broken, odd that only Denmark and the USA adhere to this practice, with the Danish wisely keeping their ceiling so high that it is never an [...]

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