Debt ceiling is an important constraint on government expenditure

I’m somewhat surprised that the Economist in its latest issue argues the US debt ceiling “serves no useful purpose and should be abolished” (From cliff to ceiling). A debt ceiling is important because it forces the Government to consider the aggregate level of government debt and the sustainability of fiscal policy over the long-term. It is not necessarily doing this every time a new spending or taxation measure is passed.

The Economist makes the incorrect assertion that “The debt ceiling is a peculiarly American anachronism.” This is not the case, as Australia also has a debt ceiling, set by section 5 of the Commonwealth Inscribed Stock Act, which limits the Australian Government to having no more than $300 billion of Treasury bonds on issue. As a Treasury officer in 2009, I well recall the huge debate in February 2009 when this limit was raised from $75 billion to $200 billion, and it no doubt created some anxiety in the Government. But it was an important debate to have because it focussed attention on the medium and long-term implications of fiscal policy.

Also, once a debt ceiling is in place, it makes Governments more carefully consider future spending increases because they realise they may have to apply for a debt ceiling increase if expenditure grows too much. Given that Governments of all persuasions typically develop a number of wasteful and inefficient programs, forcing Governments to exercise more care is a very good thing.

Finally, it is important to decouple decision making on government expenditure and taxation from decision making on the financing of Government policy measures, because Governments do not necessarily have to borrow all the money required to finance deficits. Governments could draw down on existing sources of funds, for example. The Future Fund may have provided this possibility in Australia, if it weren’t a “locked box” to use Peter Costello’s memorable phrase.  I would recommend that future Australian Governments invest future surpluses (maybe 2-3 years away) in unlocked boxes, rather than the Future Fund or Nation Building Funds, as that would provide the Government with added budgetary flexibility.

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2 Responses to Debt ceiling is an important constraint on government expenditure

  1. John Baker says:

    Thanks for posting. All entities, government, corporate and personal have “debt limits” even if they’re to stupid to acknowledge them and when it comes to “stupid” the US government is in a class by itself.

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