What is a sanctioned entity?
A sanctioned entity is a company, country, or individual that is prohibited from conducting business in a certain jurisdiction. In many cases, …
A debt ceiling is a legally imposed limit on the national debt a country can incur to finance its operations. This encompasses various components of federal spending such as:
Ultimately, debt ceilings seek to control government spending and borrowing and encourage responsible fiscal management in the process.
Denmark and the United States of America are the only two democratic countries with a debt limit set at a fixed nominal value. Most other economies set debt limits based on a percentage of GDP.
Denmark’s debt ceiling was established in 1993 as part of broader fiscal management reform and currently sits at 2 trillion Danish kroner (approximately USD 297 billion).
The ceiling has increased over time in response to economic growth and policy changes, but it’s important to note that the limit is always set at a level that far exceeds the country’s actual debt.
For this reason, Denmark’s debt ceiling is seen as more of a formality than a practical limit on government spending. The Danish government – like most other governments – manages its debt via standard budgeting processes.
In the United States, the debt ceiling dictates how much debt the U.S. Treasury can issue to cover the government’s expenses.
When spending exceeds revenue, the federal government borrows money to make up the shortfall. It does this by selling bonds, bills, notes and other securities to investors.
National debt in the United States has been on an upward trajectory since 1980, with the debt ceiling raised on 47 occasions since that time.
This trend reflects an admission made on Treasury’s official website that “As the federal government experiences reoccurring deficits, which is common, the national debt grows.”
Gross domestic product (GDP) is the total value of all the goods and services produced in a country and is a broad measure of a nation’s economic activity.
When a country’s debt (how much it owes) approaches its GDP (how much it produces), it may have difficulty servicing its debt.
This relationship is quantified by the debt-to-GPD ratio.
The metric is often expressed as a percentage, but it can also be described as the number of years a country would take to pay off its debt if GDP was dedicated entirely to repaying it.
In either case, a low ratio indicates that a country’s economy produces enough goods and services to pay its debt without incurring further debt.
A high ratio, on the other hand, increases the risk of default and is indicative of a country that takes on more debt than its economy can comfortably support.
The USA’s debt-to-GDP ratio is a lofty 123% – around 4 times higher than that of Denmark’s ratio of 29%. In dollar terms, total debt in the USA stands at just over $35 trillion compared to GDP of $28.65 trillion.
The United States frequently raises its federal debt ceiling to avoid defaulting on its various obligations. But this strategy is not without its potential ramifications.
If debt grows faster than the economy, investors (who lend money to Treasury by purchasing bonds and other securities) may be concerned that the country will find it difficult to pay its debt in the future.
As compensation for taking on more risk, investors may demand higher interest rates on loans. This, in turn, reduces the amount of money the government has to fund essential programs, services and infrastructure.
Debt limit increases are also a contentious political issue in the USA. One party may call for spending cuts and stricter eligibility requirements for benefits programs, while another believes that raising the debt ceiling improves economic activity and preserves payments to vital social programs.
On occasion, the merits of both approaches are debated until the eleventh hour. In June 2023, for example, a bill was passed to enable the U.S. Government to raise more debt (with some compromises) just 4 days before it was due to default on its debt.
Political discourse also creates uncertainty and volatility in financial markets as investors lose confidence in America’s ability to service its debt, which has far reaching implications for the global economy.
Decision-making authority around the debt ceiling rests with Congress.
Both the House of Representatives and the Senate must pass legislation that either raises or suspends (temporarily removes) the debt limit. Once the legislation is passed by both chambers, the President signs it into law.
In the case where the ceiling is suspended, the U.S. Government can issue debt to fund its commitments without restriction. However, once the suspension period ends, the debt ceiling is raised to the amount of debt incurred over the course of the suspension.
So-called “extraordinary measures” apply when the debt ceiling is reached and Congress has not yet agreed to raise or suspend it. These measures extend the date by which debt limit legislation must be enacted.
Before (or after) extraordinary measures are implemented, the Treasury department describes each and estimates their respective abilities to free up debt under the ceiling.
This is otherwise known as “headroom” and can also be described as the period of time the government can operate without requiring Congress to once more raise or suspend the debt ceiling.
To increase headroom, Treasury may resort to the following measures.
This means halting contributions to certain federal programs or funds that involve financial investments.
For example, a measure to suspend reinvestment into a fund of the Federal Employees Retirement System added $230 billion in headroom between March and August 2019.
Here, government-held assets or securities are liquidated or drawn down. This could include the liquidation of investments held in federal trust funds or other financial reserves.
Irrespective of the source of the funds, the objective is to use them to meet financial obligations and reduce debt.
Postponing issuance of new debt
Postponing the issuance of new debt means Treasury delays plans to issue new bonds or take on additional loans.
In 2011, for example, the issuance of State and Local Government Series (SLGS) securities was stopped temporarily. By halting the issuance of these tax-exempt bonds, then-Secretary of the Treasury Timothy Geithner was able to limit an increase in federal debt.
Summary:
A sanctioned entity is a company, country, or individual that is prohibited from conducting business in a certain jurisdiction. In many cases, …
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