March 20, 2023
The US debt limit is a global outlier
Once again, the United States faces a self-imposed political and economic impasse over the debt limit. Of the handful of economies to adopt debt limits around the world, the United States is exceptional in its perennial political brinkmanship over the debt ceiling.
Debt limits—which act as a ceiling on the central government’s ability to borrow money to finance existing legal obligations—are self-imposed. They are not a legal obligation to any lender. Ceilings are often intended to signal fiscal discipline to international investors or to enact checks and balances on a country’s public finances. But investors rarely like them because they can be easily skirted, making them a mild irritant. Worse, they can trigger full-scale political chaos and directly jeopardize investments.
In the United States, debt limits are set as a nominal value. Two important pieces of legislation concerning the debt limit were adopted during World War I in 1917 and right before World War II in 1939. The ballooning and unknowable costs of war and the intervening economic depression made it cumbersome for Congress to oversee each instance of debt issuance. Congress therefore gave the US Department of the Treasury considerable flexibility on the issuance and management of debt—while imposing a ceiling on total debt. Since 1960, Congress has permanently raised, temporarily extended, or revised the definition of the debt limit seventy-eight times under both Democratic and Republican presidents.
Many of these negotiations have been fraught with political deadlock, leading to serious concerns over a possible default on US debt obligations. Hitting the debt limit could paralyze the government’s ability to finance its operations—including national security initiatives, Medicare, and Social Security. It could result in a downgrade from credit rating agencies, making borrowing more expensive for the public sector, private sector, and households alike. It could also shake the dollar’s foundations, threatening its centrality in the global economy. Even the mere prospect of any of this happening worries global investors.
Debt limits like the United States’, however, are not the norm—and they rarely cause major deadlocks in the few countries that have adopted this tool. Other countries have avoided deadlocks through one of these four routes:
- The ceiling is intentionally set sufficiently high such that it will not plausibly be crossed.
- The law is either amended or suspended during periods of heightened stress necessitating indebtedness.
- No punishments are tied to the legislation, meaning states often cross the limit with impunity.
- The law was scrapped altogether when it was severely curtailing the government’s policy space.
How do other countries manage debt limits?
Denmark
Like the United States, Denmark also sets its debt limit as a nominal value. But that’s where the similarity ends. The Danish Parliament intentionally sets the ceiling sufficiently high such that it will not be crossed, rendering it no more than a formality.
The Danish Parliament first passed debt ceiling legislation in 1993 as a constitutional necessity resulting from administrative reorganization of government institutions. Since then, the debt limit was amended just once in 2010, when the country’s debt remained far under the limit. The ceiling was doubled to DKK two thousand billion or 115 percent of 2010 Danish gross domestic product (GDP), far higher than actual debt levels. Denmark’s outstanding general government debt in 2023 is DKK 327 billion, which is only 16 percent of the debt ceiling. The 2010 doubling was executed with the explicit intention of avoiding any risk of nominal gross debt ceilings affecting ongoing fiscal policies in response to the 2008 recession.
Kenya
Like the United States and Denmark, Kenya also has a nominal debt limit. However, it is under the process of replacing the nominal limit with a limit as percentage of GDP at 55 percent. The intention is to make debt management more sustainable—or in other words, to finance budget deficits in the medium term without needing to repeatedly negotiate the debt limit.
The government has typically stayed within the constraints of debt limit legislation. But when push came to shove, the Parliament of Kenya has increased the limit in advance to avoid an economic impasse. Parliament recently increased the debt limit from KES nine trillion to KES ten trillion to enable complete financing of the 2022 / 2023 budget. The legislation had a majority in parliament. Opposition from a few members of parliament leading up to the limit raise had less to do with political infighting, and more to do with concerns regarding vulnerability to debt distress. This raise is nevertheless understood to be an interim measure while Kenya moves to debt limits as a percentage of GDP.
European Union
The European Union (EU) joins the United States as the only other Group of Twenty member to stipulate a formal debt limit—albeit of a different type. The EU’s Stability and Growth Pact (SGP) stipulates that a member’s debt cannot exceed 60 percent of its GDP. If a state breaches that ceiling, the excessive debt procedure (EDP) is automatically launched by the European Commission. It consists of several steps—culminating in sanctions—that intend to pressure the state to return to that 60 percent figure. This debt limit is meant to safeguard the stability of the common currency.
The EU’s debt limit legislation imposes strict penalties on transgressors, but exhibits adaptability to extreme economic duress. The legislation includes a “general escape clause” which can only be triggered in a severe economic downturn. It was triggered in response to the pandemic in 2020 and has yet to be reinstated. The EU is now actively exploring fiscal reforms including the debt limit, particularly to help countries implement the green and digital transitions, meaning the debt limit may not return in its current form.
Poland
Within the EU, Poland also has domestic laws to limit debt. Constitutional articles stipulate that national public debt cannot exceed 60 percent of the annual GDP. Here too, the law has shown flexibility to circumstance.For instance, some of the toughest measures to manage debt levels were suspended to facilitate response to the economic slump in 2013.
Malaysia
Malaysia’s debt limit is set at 60 percent of GDP, lifted from 55 percent in 2020 to aid the government’s response to the pandemic. It was lifted further temporarily to 65 percent of GDP in 2021 to make room for additional borrowing and fiscal stimulus, and this temporary provision lapsed on December 31, 2022. Unlike the United States, the debt limit is not governed by any act and is self-imposed by the Ministry of Finance. Parliamentary approval is not necessary to raise the debt ceiling and the government will not “shut down” in the event of exceeding the limit. The government can simply revise the limit when needed. Subsequent governments have nevertheless remained approximately within bounds of the debt limit. Now that the limit has returned to 60 percent following the temporary raise to 65 percent, the Malaysian prime minister has assured that the government will gradually lower the nation’s debt and return within bounds of the debt limit.
Namibia
The Namibian debt ceiling is set at 35 percent of its GDP. However, this figure is non-legislative and the Namibian debt-to-GDP has been above that level for years. In 2021, Namibia’s debt was 72 percent of its GDP.
The Namibian government has attempted to return to that 35 percent figure. It has cut its national budget and created a sovereign wealth fund. These efforts, however, have been severely hampered by government spending during the COVID-19 pandemic and food shortages resulting from the war in Ukraine.
Pakistan
The Fiscal Responsibility and Debt Limitation Act of 2005 requires the Pakistani government to reduce total public debt to 60 percent of GDP by 2018. But the legislation does not stipulate any punishment for breaching that limit. Without an incentive to stay under it, Pakistan’s debt has continually been over the limit. The debt-to-GDP ratio this fiscal year is 75 percent.
Limitations of the debt limit
Australia briefly experimented with a debt limit similar to that of the United States, experienced the political infighting that Washington is familiar with, and abolished it soon after. In response to the Global Financial Crisis, the government introduced a debt ceiling of AUD seventy-five billion in 2008 to signal its commitment to fiscal prudence. But deficits persisted, and the government raised the ceiling multiple times to staunch resistance from the opposition, culminating at a limit of AUD three hundred billion. When the new government in 2013 was met with strong resistance to increasing the limit yet again, it ultimately decided to scrap the law altogether.
Debt limits are self-imposed tools to facilitate sound fiscal policy. But in practice they serve as orienting goals or tools of political bargaining at best, and triggers of economic chaos at worst. It is unsurprising that most of the world chooses to have no such limit.
The United States is one among the few polities that have adopted and retained debt limits. Within that tiny group, it is unique in its inability to find workarounds which could inadvertently harm its national interest.
Mrugank Bhusari is an assistant director with the GeoEconomics Center focusing on international finance and global governance. Follow him on Twitter @BhusariMrugank.
At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.
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