Why have a debt ceiling?

I have no problem with the Federal Government pushing to raise the debt ceiling to $500 billion (i.e. around one-third of the level of our GDP of $1.5 trillion), which on current projections is likely to be several tens of billions of dollars in excess of what it would actually need, as reported by the Australian. Given the uncertainty in budget projections, it’s a good idea to get a buffer in case the budgetary situation gets worse, although it’s now hard to see how it could deteriorate much further than it has over the last twelve months.

I recall from my time in Treasury’s Budget Policy Division that the current debt ceiling is a recent invention, the result of changes to Commonwealth financial management undertaken by the Howard Government. Prior to these changes, there was no limit on total Commonwealth debt, although approval to borrow sufficient money to cover the borrowing requirement was sought every year in a Loans Act as part of the package of Budget appropriation bills. Given the convention not to block supply (i.e. not to block the Budget appropriation bills), which has been almost always honoured (with one notable exception in 1975, of course), each Loans Act was approved along with the other Budget bills and there was no risk of the Government not being able to borrow.

But now we have a debt ceiling, and it may be asked whether it’s necessary or whether we’d be better off going back to the old system? My feeling is that the debt ceiling is a good idea, because it forces the Government to consider the cumulative, long-term consequences of its decisions, as I posted on earlier this year:

Debt ceiling is an important constraint on government expenditure

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