A Budget Reform Travelogue: Breaking the Ceiling and Embracing the Debt Brake
In the complex world of global finance, few scenarios concern economists as deeply as a potential U.S. debt default. The repercussions could be far-reaching: destabilized financial markets, disrupted international trade, and a crisis of confidence in American treasury bonds that have long been viewed as ultra-safe investments. This isn’t the plot of some far-fetched economic thriller; it’s a tangible risk that’s loomed ominously close in 2011, 2013, and 2023.
At the heart of this fiscal conundrum lies the debt ceiling, a century-old legislative mechanism that sets a legal limit on how much the federal government can borrow to pay its existing obligations. Revised 78 times by Congress since 1960 and wielded by opposition parties to curb fiscal expansion, the debt ceiling is intended to serve as a check against unrestrained government spending.
Yet this fiscal safeguard is more of a mirage than a bulwark. While much attention is paid to the worst-case scenario of government default when the ceiling is breached, there’s another irony at play: when fiscal restraint is most crucial, the debt ceiling often goes AWOL. For example, it was completely suspended during the COVID-19 pandemic, allowing for uninhibited spending. Once the dust settled, a limit was established based on the new, higher level. This cycle raises a question: how can the debt ceiling curb reckless spending if it’s absent when spending is at its peak? It’s like installing a speed limiter in your car, but one that conveniently deactivates whenever you’re in a hurry or on an open highway.
Moreover, the United States virtually stands alone on the global stage with its debt ceiling policy. (Denmark, the only other nation with a similar measure, sets its limit so high that it’s virtually unreachable.) This peculiar American production makes for poor viewing elsewhere—not just because there’s no equivalent in other countries, but also because most international audiences enjoy healthier debt-to-gross domestic product (GDP) ratios. The singularity of America’s debt ceiling can only be understood through the lens of its distinct historical context. Unlike most countries in which governments could always raise debt at their discretion, the U.S. Congress long insisted on micromanaging each borrowing scenario. Introduced in 1917 to streamline this process, the debt ceiling has become a central character in America’s fiscal story. Despite numerous attempts to write it out of the script—with critics ranging from the Government Accountability Office to a revolving cast of treasury secretaries—the debt ceiling remains. Its persistence owes to the fear of unleashing a spending free-for-all and the gravitational pull of historical precedent.
The key question is whether the debt ceiling can be transformed into a fail-safe measure while maintaining its original intent. Fortunately, several European countries offer a system that does just that: the debt brake.
Facing escalating debt-to-GDP ratios in the 2000s, Germany and Switzerland successfully implemented “debt brakes” to rein in fiscal deficits. In contrast to the debt ceiling, which merely sets a hard borrowing limit, the debt brake aims to balance budgets and manage deficits across economic cycles by requiring corrective actions when necessary.
The Swiss model requires budget deficits to be offset in subsequent years and tightly controls government spending through a business cycle adjustment factor linked to annual GDP growth. Essentially, unless suspended due to extraordinary circumstances, this system operates on autopilot, guided by a mathematical formula. Germany takes a more straightforward approach, limiting its structural deficit to 0.35 percent of GDP annually without capping overall debt while allowing for cyclical borrowing during economic downturns that must be repaid later. These models, like the debt ceiling, can also be suspended from time to time for situations like the COVID-19 pandemic—the difference is that, when reinstated, they immediately begin to modulate the speed and trajectory of government spending, preventing it from spiraling out of control.
Among conservatives yearning for more cautious fiscal stewardship, the Swiss debt brake is something of a holy grail. But there are compelling reasons to consider the German model as well, particularly since Switzerland’s stringent rules might prove politically untenable in the United States. This isn’t to suggest that Germany’s debt brake mechanism is flawless—in fact, it frequently faces criticism for its rigidity. While acknowledging that the measure “has served Germany well,” the International Monetary Fund has also recently called for its relaxation.
Given this, any apprehension about implementing a debt brake likely stems not from doubts about its efficacy, but rather from concerns that it might work too well. Indeed, debt brakes stand as one of the clearest, most empirically validated policy tools. Notwithstanding the heated debates it has sparked, only 6 percent of German economists advocate for its complete abolition. The real question is whether a debt brake might inadvertently neglect other long-term goals in its zeal to fulfill the measure’s primary purpose. This is where the German debt brake model shines as a particularly compelling option: more intuitive and modifiable than its Swiss counterpart, it could offer policymakers crucial wiggle room to navigate fiscal challenges with operational flexibility.
Building on the strengths of the German approach while addressing its potential limitations, we can envision a U.S. fiscal framework built on this blueprint, but with strategic modifications. By applying the debt brake mechanism solely to discretionary spending while excluding mandatory expenditures and interest payments, we could craft a targeted tool for deficit reduction. This approach would allow for precise fiscal management in areas directly under government purview while safeguarding against default scenarios.
Moreover, the German debt brake comes with a rich history of analysis and suggested improvements, offering a wealth of insights into potential refinements. Taking cues from reform proposals by Germany’s Free Democratic Party, we could enhance our adaptation with provisions for essential investments. This might include elevated borrowing thresholds or specific exemptions for critical projects, subject to periodic reassessment. Such a framework would strike a delicate balance between fiscal prudence and economic vitality—a compelling starting point for U.S. fiscal reform.
Adopting this new approach would require navigating some challenging trade-offs, but it presents an opportunity to transcend the current debt ceiling impasse. In today’s polarized political landscape, pioneering a uniquely tailored debt brake system could, and should, emerge as a promising middle ground.