Can a Debt Ceiling Be Sensible? The Case of Denmark II
In response to many inquiries prompted by my previous posting about the debt ceiling in Denmark, I thought it sensible to add a few more details about the origins of the Danish debt ceiling and how and why it has been changed over the years.
The Danish debt ceiling was first instituted by law in 1993 . This decision followed an administrative Danish government reorganization in 1991, in which a number of tasks transferred from the Ministry of Finance to the Danish National Bank. As a result, the management of Danish government debt and related tasks were now to be conducted by the Danish Central Bank on behalf of the Danish Ministry of Finance, while the latter retained the overall and political responsibility for Danish government borrowing and debt. This responsibility included relations with the Danish Parliament, which according to the Danish Constitution is the only entity that can authorize the issuance of Danish government debt.
The 1993, the Danish Debt Ceiling was consequently instigated as the legislative basis for the Ministry of Finance and the Danish Central Bank to raise loans on behalf of the Danish government in accordance with the overall objective of Danish government debt policy1.
The Danish fixed nominal debt limit—legislatively outside the annual budget process—was created solely in response to an administrative reorganization among the institutions of government in Denmark and the requirements of the Danish Constitution. It was never intended to play any role in day-to-day politics.
The fact that the Danish Debt Ceiling was always a “legal formality” and not a political institution is verified by the level of 950 billion Danish kroner (Dkr) at which it was set in 1993. This level was 30 percent above total outstanding gross general government debt. Moreover, between 1993 and 2010—when Danish nominal GDP almost doubled—outstanding gross government debt was at no point within Dkr 140 billion of the legal debt ceiling. It was thus never a political issue.
In 2010, at the time of the only lifting of the Danish Debt Ceiling, Danish GDP had about doubled relative to 1993 when the Dkr 950 billion limit was written into law. Moreover, during the financial crisis in 2008-2009, the Danish government saw a very large increase in its gross outstanding debt. Consequently, it was decided to raise the Danish debt ceiling to Dkr 2 trillion , i.e. just over double the previous ceiling and roughly in line with the growth in GDP since 1993.
The explicit intent of this move—supported incidentally by all the major parties in the Danish parliament—was to ensure that the Danish debt ceiling remained far in excess of outstanding debt and would never play a role in day-to-day politics.
1. This strategy dictates that the Ministry of Finance and the Danish Central Bank attempt to cover government financing requirement at the lowest possible long-term borrowing costs, while taking into account the degree of risk. Furthermore, the aim is to support a well-functioning domestic financial market and facilitate the central government’s access to the financial markets in the longer term. See the Danish Central Bank .