Only One Democratic Country, Besides America, Has a Debt Ceiling

Jul 19, 2011 6:59am

ABC News' Amy Bingham reports:

It’s 14 days and counting until financial apocalypse descends upon U.S. markets, yet lawmakers are still seemingly eons away from striking a deal to reduce the deficit and raise the debt limit. The ferocity of the debate coupled with the warnings of impending doom begs the question, why does America have a debt ceiling in the first place?

A report released Monday by Moody’s analyst Steven Hess points out that the United States’ debt limit “is an uncommon attribute not shared by most” countries. The U.S. is the only democratic country, besides Denmark, in which Congress has to approve borrowing separately from spending. In most other countries the authority to borrow money is inextricably tied to the authority to spend money.

For example, in Canada the executive branch can borrow as much money approved to spend in the yearly budget.  In Sweden, borrowing is also linked to the budget, although the legislature does not decide how much money the Finance Minister can borrow but instead decides how many programs it can fund.

And in the United Kingdom and New Zealand, the Treasury department has the authority to borrow as much as they need to fund congressionally approved spending.

Only Denmark has a system similar to the United States where the legislature has to approve increases to the debt separately from approving the budget. The Danish set the ceiling high enough so that it never slows the process of borrowing money and they can avoid political conflicts like the one currently gripping the U.S.

Barry Bosworth, a senior fellow at the Brookings Institute, said the U.S. debt ceiling “has no logical basis.”

Congress, through budget and appropriations bills, has sole authority to decide how much the government will spend, so he said “it makes no sense to have a secondary rule to then object to the deficit that emerges from the other decisions.”

The debt ceiling, Bosworth said, is a ”political device” that the minority party uses “to fuss and posture.”

“But they ultimately accede because they understand that the change in the debt is just the result of their own decisions,” Bosworth said.

The idea behind creating a debt ceiling “was to make Congress slow down its spending, be more careful about what it expended and think more about the obligations it was pursuing,” said former Minnesota Rep. Bill Frenzel, who served as the ranking member of the House Budget Committee and was an advisor to Presidents Bill Clinton and George W. Bush.

The debt limit was established during the lead up to World War II as a way to give the Treasury “freer rein to manage the federal debt as it saw fit,” according to a Congressional Research Service report.

Since 1939 when it was first created, the U.S. has never exceeded the debt limit and gone into default.

A February 2011 Government Accountability Office report said experts believe there is a “weakness in the U.S. budgetary framework” because Congress can approve spending without approving the borrowing necessary to fund that spending. This can cause uneasiness in the market. 

 The GAO conferred with former congressional staff, former CBO directors, former Treasury officials, and representatives from credit rating agencies to find ways to better link policy decisions with the effects they will have on the debt.

The GAO report found that the United States acted the opposite of most countries because it uses the debt limit to shed light on runaway spending rather than using spending bills to address growing debt.

Germany, for example, approved a constitutional amendment in 2009 that requires their budget to be virtually balanced, only allowing the deficit to be .35 percent of gross domestic product.

The European Union caps the debt for member countries at 60 percent of GDP.

Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, argued this measure was “just an indicator, not a hard and fast limit.”

With Greece’s debt expected to peak in 2012 at 161 percent of the country’s GDP, the EU is talking about creating more stringent enforcement procedures to ensure countries do not break the 60 percent mark in the future.

But according to Gagnon, the EU will not consider a system like that in the U.S.

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