A standoff between the White House and congressional Republicans over raising the US debt ceiling has brought the world’s largest economy to the brink of defaulting on its bills.

This is not the first time that the old due process mechanism has caused confusion in Washington. Yet in Denmark, the only other democracy with a similar type of nominal debt ceiling, hardly anyone knows it exists.

President Joe Biden and Republican House Speaker Kevin McCarthy held what the latter called a “productive” meeting at the White House on Monday, but agreement remains elusive.

The Republican-led House of Representatives wants drastic cuts in federal discretionary spending, new work requirements for welfare recipients and an expansion of mining and fossil fuel production. The White House has resisted so far.

The United States will stop paying its bills for the first time, if the Democrats and Republicans cannot break the deadlock before June 1. This would likely have serious economic ramifications, including a recession, massive federal job losses, and a global stock market crash.

The debt ceiling has been in place since 1917 and allows Congress to limit the amount of money the federal government can borrow to cover its bills, making up the shortfall between what it collects in taxes and what it spends on government activities already approved by the Congress.

It has risen 78 times since 1960, last rising by $2.5 trillion in December 2021 to $31.381 trillion.

Discussions about raising the debt ceiling, once routine, have increasingly become a platform for brinkmanship, particularly since 2011, when Republicans also threatened a default if the Obama administration didn’t concede. spending cuts.

The episode prompted S&P Global to issue a first-time downgrade of the US credit rating, while Senate Minority Leader Mitch McConnell said at the time that the debt ceiling, and by implication , the US economy, was a “hostage worth rescuing.”

The limit was raised unconditionally by the Democratic-led House three times under the administration of former Republican President Donald Trump, but now history is repeating itself.

Separation of church and state

While the US debt ceiling restricts government borrowing to a particular number, most other economies set debt limits as a percentage of GDP.

For example, the countries that are part of the European Union, according to the rules established in the Maastricht Treaty, undertake to keep their public debt below 60% of GDP and to maintain an annual budget deficit of less than 3%.

Denmark is the only other democratic nation in the world with a debt limit set at a fixed nominal figure, but it never produces the same political and economic turmoil. In fact, it is hardly talked about.

This is largely because the Danish debt ceiling was designed to be a synthetic constitutional provision and was set so high that it would never become the “political bargaining chip” it has in the US Laura Sunder-Plassmann, associate professor of economics at the University of Copenhagen.

Sunder-Plassmann also explained that Danish politics is less politically polarized than American politics, with two large and a dozen or more smaller but not insignificant parties represented in parliament.

“While there are definitely arguments in favor of fiscal rules, most advanced countries have opted for soft debt-to-GDP (and deficit) limits instead of nominal amounts, which, while perhaps not perfect, at least avoid the kind of debates I now see in the United States,” he said by email.

The Danish debt ceiling, or “gældsloft”, was implemented as a constitutional requirement in 1993 after a restructuring of the country’s government and was set at 950 billion Danish kroner ($137.5 billion). Danish politicians see it as more of a synthetic formality, largely set up to reassure parliament and the public that the government of the day cannot go rogue.

Denmark has historically maintained a strong fiscal position, but suffered a significant deficit in the aftermath of the 2008 financial crisis, which caused the debt ceiling to be increased in 2010 to DKK 2 trillion.

This is a considerable limit for a small country of around 6 million people with a national debt of just 323 billion kroner at the end of 2022, according to the National Bank of Denmark.

Denmark runs a budget surplus and has seen its debt fall substantially over the past decade. The national debt to GDP ratio steadily declined to a peak in 2020 caused by the Covid-19 pandemic and fell back to just over 30% of GDP in late 2022.

Jesper Rangvid, a finance professor at Copenhagen Business School, told CNBC on Tuesday that the Danish system is structured so that political decisions on tax policy are limited to the public budget for taxes and spending each year, with the debt ceiling as a completely separate item. formality.

“It’s just not discussed in this country because it’s just not an issue, and that’s of course because of this factor that there’s been all those surpluses for many years in the government budget and therefore the debt has actually been falling for many years,” he explained by phone from Copenhagen.

“We have the political discussion when we decide on spending and taxes and so on, and the debt limit shouldn’t constrain that, which of course is very different to the US, where they both have yearly discussions on the budget, on the expenses and income, and because you’re constantly running deficits, then you also have debt limit discussions.”

Rangvid added that while Danish politicians from the country’s plethora of political parties have a very broad spectrum of views on fiscal policy, the key difference is that the forum for discussing them is limited to the annual budget. Therefore, other government functions cannot be held hostage to the fiscal demands of opposition parties.