Show host Gene Tunny discusses the ineffectiveness of the U.S. debt ceiling, citing its frequent increases and the political grandstanding it entails. He notes that since 1960, Congress has amended the debt limit 78 times. Tunny argues that the debt ceiling does not enforce fiscal discipline and highlights the need for better fiscal rules, such as the Swiss Debt Brake or the Taxpayer Bill of Rights. He also shares his experience with Australia’s debt ceiling during the late 2000s financial crisis. Tunny concludes that Trump’s criticism of the debt ceiling is justified.
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Timestamps for EP268
- US Debt Ceiling Overview (0:00)
- Historical Context and Modern Monetary Theory (4:09)
- Ineffectiveness of the Debt Ceiling (7:07)
- Australian Experience with the Debt Ceiling (13:00)
- Conclusion and Alternative Fiscal Rules (24:49)
Takeaways
- Debt Ceilings Are Ineffective: The US debt ceiling fails to control spending or debt accumulation, as it is consistently raised to avoid financial crises.
- Alternative Fiscal Rules: Spending caps or frameworks like Switzerland’s debt brake are more effective at managing fiscal discipline than nominal debt ceilings.
- Political Grandstanding: The debt ceiling often serves as a stage for political drama rather than meaningful fiscal reform.
- Modern Monetary Theory Critique: Printing money to avoid debt constraints, as proposed by some MMT advocates, risks inflation and economic instability.
- Lessons from Australia: Australia abolished its debt ceiling a decade ago after recognizing its downsides, offering a model for US fiscal policy reform.
Links relevant to the conversation
Useful information on the US debt and deficit from the US Treasury:
https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/debt-limit (discusses how many times the debt ceiling has been amended)
https://fiscaldata.treasury.gov/americas-finance-guide/national-deficit/ (contains the spending, revenue, and deficit figures that Gene mentions)
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Transcript: US Debt Ceiling: Why Trump is Right to Call for its Abolition & Gene’s Experience with Aussie Debt Ceiling – EP268
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:00
Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene, Tunny, I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. The incoming us. President Donald Trump has called the US debt ceiling ridiculous. In this episode, I’m asking, Is he right about that? I have some fairly strong views on the debt ceiling, having been involved in policy regarding the debt ceiling here in Australia. So we used to have a debt ceiling. So I’ll talk a bit about the Australian debt ceiling. In my experience with it back in 2008 when I was an officer in Treasury. I’ve been prompted to cover this issue because the debt ceiling is part of the ongoing debate about the US budget, which flared up in the week before Christmas, Congress had to pass a continuing resolution to continue the funding of the federal government. So the federal government agencies had sufficient funds, and part of it, part of the debate, is the debt ceiling, the amount of debt that the US government can have on its book, so the amount of money it can borrow, and the debt ceiling has been suspended for a couple of years now, and it has to be renewed next year. So this is going to be an issue for the Trump administration. The US federal debt is well beyond the debt ceiling. The current debt ceiling is, think it’s around $31 trillion it’s 31.38 and a few other digits, trillion dollars. So a trillion is 1 million million. So 31 million million dollars. It’s it’s a big number. However, the US government has significantly more debt than that. The current gross debt is around 36 trillion so when the US government, when the Congress approves an increase in the debt ceiling, which it’s, you know, almost certainly it will do it will have to do to avert a major financial crisis, then it will have to increase the ceiling to accommodate the current level of debt, plus additional debt that the US government will incur in in future years, given that the US is still running very large budget deficits. So I think there’s no doubt they will, they will increase the debt ceiling, and we end up with this. You know, with these frequent debates over what the level of the debt ceiling should be, and there’s a lot of political grand standing over it, and hence we have Donald Trump saying, well, let’s just get rid of it. Okay, so what is the rationale for the debt ceiling in the first place? The rationale for it is that it’s going to enforce fiscal discipline of some kind. It will limit the amount of debt. Now it hasn’t really done that. In fact, the US Treasury website tells us that since 1960 Congress has acted 78 so 78 separate times to permanently raise, temporarily extend or revise the definition of the debt limit, and that was 49 times under Republican presidents, 29 times under Democratic presidents. And the Treasury writes on its website, congressional leaders in both parties have wrecked. Recognized that this is necessary, indeed it is necessary, because without borrowing the additional money, the US government wouldn’t have the cash available to to actually pay the bills, to pay Social Security recipients to pay Medicare, to pay interest on the debt, all of the things governments spend money on. Now the modern monetary theory, people might say, well, the government can essentially just print money. And indeed, one of the ideas for getting around the debt ceiling is to for the US Treasury to mint a $1 trillion coin. Of course, as I’ve discussed in other episodes of of this podcast, I’m not a fan of modern monetary theory. I think that’s a very you know, that’s the wrong way to go about things, particularly because it’s going to be inflationary. So assuming we’re not going to follow modern monetary theory, the government does need to borrow money to cover deficits, and hence, if it weren’t able to do that, and then if it ended up defaulting on some of its debts, not paying bondholders interest in time, then that’s going to cause trouble in financial markets. I mean, it’s hard to imagine what a default of the US government could do to both the US economy and the global economy. It certainly would be, would be very bad. There’s no doubt about that. And the congressional leaders so they will politically grandstand, but ultimately they will, they will have to to change it. And hence, the debt limit really doesn’t seem terribly effective, in my view, because it just keeps getting lifted. It could be argued that at least it does spark a public and political debate on national debt and the spending priorities of the government, of the US government. And it’s also an opportunity to negotiate some broader fiscal reforms, such as, there was a Fiscal Responsibility Act of 2023 and that included some spending caps. So you could make an argument it does have some some benefit, but given the sizable US budget deficits we’ve talked about on this this show before, it doesn’t really seem to be having a substantial impact on the US budget, on prompting Congress to fix the budget in dealing with entitlements, which is where a lot of the spending is coming from, it doesn’t really have much of an impact on that. So if we look at the Treasury website, there’s a site fiscal data, treasury.gov.au, it will give you the the figures on on the on the deficit and for the fiscal year 2024 25 we see that there was $6.75 trillion of spending compared with $4.92 trillion of revenue for a total deficit of Well, the deficit is needed to make up the gap between revenue and spending. So to cover the shortfall in revenue, a deficit of $1.83 trillion which is, you know, another bit of evidence, in my view, supporting the notion that this debt ceiling is is rather ineffective. It it doesn’t really work to to address the underlying problems, other issues with it. Well, I mean one, one thing that is seems obvious to me is that it doesn’t really make a lot of sense to have a a debt ceiling or a fixed or set in nominal terms, in terms of current dollars, because the, well, the economy. Economy is going to get larger, there’s going to be inflation, and so hence having a debt ceiling in nominal figures, say 31 trillion. Well, what if you have inflation? Then that is lower in real terms. Or what if the economy expands and the the government could could actually tolerate if you could cope with a higher level of debt without any trouble? So having a debt ceiling in nominal terms is is a bit silly to me, so I’m not really a fan of it for that reason as well. So I would say that I think Trump is right about the debt ceiling, and it’s for those reasons the debt ceiling is ineffective, and also because, once the decisions around revenue and spending have been made by the Congress or by the Parliament here in Australia or in the United Kingdom, the amount of debt you end up with follows from those decisions. It’s not something that the government is choosing independent of those other of those other decisions. So it’s it’s the revenue and the spending decisions that are the critical decisions. That’s where the the action is. That’s where, if we are going to have rules that try to get better fiscal outcomes, that’s where they need to act the debt ceiling. All it seems to do is, once those spending and revenue decisions are made, and as we saw with those data for the US, with the with spending massively outstripping revenue, so spending on entitlements, Medicare, Social Security and also the large national defense budget, arguably you know, a necessary budget, but there is, of course, a lot of fraud, well, maybe not fraud, but a lot of waste in that budget. The Pentagon fails multiple audits. So there are concerns about that. Once those decisions are made, then the amount of debt really just follows from that, because the government needs to borrow the money to make up for the shortfall. So that’s that what that’s what needs to be fixed up. And given that, we can’t see any situation where Congress wouldn’t agree to to increase the debt limit, unless it, unless they wanted to, if, unless they were reckless in a way, or unless they they thought politically, it would make sense for them to crash financial markets so that I can’t see any any logic in that, or Political logic in it for their from their perspective, they’re going to increase it. And hence, you know, the action is going to be on revenue and expenditure. And this is where, as I’ve talked about on this show before, the Trump administration is going to face big challenges, because Trump doesn’t want to lift taxes. In fact, he wants to cut taxes. And he also doesn’t want to cut people’s entitlements, because he’s, you know, he’s a brilliant politician, really, and he knows that that sort of thing is not going to be popular. And he’s, uh, he’s going to try and find a way to control spending, which is politically beneficial or not politically costly for him, that will end up being difficult, I expect, because of the the nature of the entitlement programs and how it’s it’s hard to see saving a lot of money there without making some unpopular decision. So we’ve just got to wait and see how what happens there. Now, I mentioned earlier that I have some experience with a debt ceiling. In fact, we had a debt ceiling in Australia for several years from around 2007 at 2013 and this was set in the what’s called the Commonwealth inscribed STOCK Act. And I remember that act rather well because my team in Treasury. Three were in the debt policy unit. We had to amend that act of parliament. I mean, it was a very simple amendment. We had to change a number in in an Act of Parliament. So the bill was relatively simple, but we ended up having to do all of the paperwork associated associated with that, all the briefing, all of the analysis, I mean, the aofm, the Australian Office of Financial Management. It took care of all of the technical details and the borrowing the money. So big. Shout out to them in the treasury. We, we were looking at the budget and full, you know, based on what we knew about the state of the economy, the state of revenue, the government’s plans for a stimulus package. This is around late 2008 it was, wasn’t long before Christmas. I remember, we discovered that the revenue was much weaker than than previously forecast, and that, hence the the second stimulus package that government expected it would have to do, I suppose, or knew with a significant probability it would have to enact. It realized then that Okay, time, the time is, is right. This has to be done. And so the government suddenly has to start borrowing a lot of money. And the problem was that I can’t remember the exact figure, but at the time, we would have had between 50 to $55 billion of Australian government debt, of bonds on issue and in the Commonwealth inscribed STOCK Act, the limit was set at $75 billion now I have no idea. I wasn’t in the relevant team at the time that that limit was set, if I were, I would have advised against it, because it became clear very quickly that we were kind of sale well past at $75 billion when we had deficits of of many 10s of billions in in each year over the budget forward estimates, we had the financial crisis, and we, I think we would have had deficits of maybe 40 or something billion in one year, or I’d have to check the exact number, but we had rather large deficits, and over the forward estimates, they added up to an amount that meant that we would be approaching 200 billion. So 200,000 million dollars worth of debt. So we needed to change that number in the the Commonwealth inscribe STOCK Act to 200 to 200 billion. So we had the bill drafted, we prepared the explanatory memorandum, and we also worked on the the updated economic and fiscal outlook, essentially when we got back to Treasury after Christmas. And we did that in a, you know, very quick period in, uh, over January. And so it came out in early February, February 3, if I remember correctly, and then it just everything sort of went a bit crazy, in a way, the government announced, okay, things are much worse than we expected. We’ve got this new stimulus package. You can argue about whether that stimulus package was necessary or not. But regardless of whether or not the Rudd Government had a stimulus package, we would have, we would have had to have increased the debt limit, the debt ceiling, because revenues had collapsed, particularly in company tax receipts, because companies their revenues were down. Mining companies were making less revenue because of what had happened to commodity prices, and we were we needed to borrow more money. There was just no getting around it unless the government was going to engage in some sort of fiscal austerity, some perverse fiscal policy. And so we thought, okay with the government’s come clean about what’s going on. Everything’s okay. Now the aofm, the Australian Office of Financial Management, will be able to start borrowing money, and everything will be fine. Government won’t have to worry about whether there’s enough money in the bank, at the Reserve Bank, which you know, prior to getting that approval, or prior to having the AFM starting to borrow money again, that could have been an issue. There could have been an issue regarding whether there would have been sufficient funds. Dollars in the government’s bank account, the Reserve Bank. So we clearly needed to borrow money again. We needed to start the bond market up again, having larger bond auctions, and we needed to get that debt limit up to 200 billion. So what was a real surprise was when the then opposition leader Malcolm Turnbull announced that the gov, the opposition, at the time, wouldn’t support increasing the debt limit. And this was a huge, a huge shock politically, you can see why they do it, but it still came as a as a big shock. And when you think about it, I thought it, it didn’t make a lot of sense, given that in Australia, there’s been since the dismissal of the Whitlam government in 1975 which caused a lot of political turmoil and divided the country. Since that time, there’s been a consensus that the opposition would not block a federal budget. It would not block appropriation bills, which would, you know, which would bring a crisis of supply if they blocked those bills? That’s what happened in 1975 that’s what led to the dismissal of the Whitlam government. So there’s been a consensus that oppositions would support the budget. But here we had an opposition acting in a way which was effectively, would effectively have blocked the government’s plans with the budget or its updated budget, its mini budget, you could call it in February, 2009 and so this was a rather extraordinary situation. And I remember at the time, you know, we were scratching our heads about this, what’s going on? I mean, it did end up getting. It got passed at the end, I think, with green support in the Senate. I remember David Parker, who was acting treasury secretary at the time, and I had to go up to the Senate to explain to Bob Brown, who was the Greens leader at the time, what was going on, and provide some some background in the situation. So it was a it was a relatively tense time, and to what? Well, I guess the lesson that I took out of it is, let’s not have one of the lessons is, let’s not have really silly fiscal rules, like a debt limit of some kind, which ultimately just leads to political grandstanding, or at worst. I mean, if, if it actually did apply, then it could lead to a major, uh, financial and potentially wider economic crisis. So I’m not a supporter of a debt limit as much as I want to reduce debt as much as I believe in sound fiscal policy. I think a debt limit or a debt ceiling is the wrong way to go about it. And hence, I think President Trump, incoming, President Trump is, is on the right track there. And I think, look, perhaps he, he’s going to be the the president who will, he’ll be able to get them to to abolish it. I mean, he’s, he’s got a lot of seems to have incredible persuasive powers. So, so let’s see what happens Australia, by the way, we did away with our debt ceiling in in 2020 13. So the the new Abbott Government, it sought to increase the limit to 500 million, but 500 billion. But ultimately it decided to to abolish it, given that it now it’s inefficient, or it’s creates, you know, political risks. It’s, yeah, it’s just not terribly effective. So I think that was the right decision. And I’d also support getting rid of the budget, limit the budget, or the, sorry, the debt limit, debt ceiling in the US. And that’s not to say that they shouldn’t fix up their their budget. They need to do that. That’s an absolutely, absolute priority. But I don’t see the the debt ceiling has been as being part of that. What I would suggest, and this is something I I’ll cover in a future installment, is. What I think works better is a rule on spending. If you have some rule or some guideline regarding government spending, then that can be potentially more effective, or I think it will be more effective. And you know, arguably, may be desirable. And rules to look at include the Swiss debt break, and that requires that the the budget, the national budget in Switzerland, that’s balanced over the course of the business cycle, and that’s achieved by having a spending ceiling, so a limit on the amount of spending linked to revenue levels adjusted for economic conditions. So it’s a way of making sure that spending is is commensurate with the sort of long run revenue growth, so you’re not getting ahead of your revenue and not ending up with with permanent with structural deficits. So that’s the idea. You want a rule like that, of some kind. Another rule that is popular is the taxpayers Bill of Rights, which Dan Mitchell has called America’s fiscal gold standard, and any revenue above the growth of population plus inflation, any additional revenue that has to be returned to taxpayers, it rebated. So it’s a way of limiting the amount of of money that governments have to spend, it means that they don’t go and spend windfall gains in revenue. And that’s seen as a particularly effective way of of limiting government spending. That’s, it’s that’s possibly a bit more controversial than the debt break. I think the debt breaks arguably got more to recommend it. I have some concerns about table or just just the nature of it, and I have to you know how I want to look at that a bit more closely before I recommend it, I’d be more likely to recommend the Swiss debt break, and certainly I mean, Switzerland’s had a very good fiscal performance since it’s adopted it and over the last couple of decades, and it has low debt to GDP compared with the Eurozone average, so much lower. And the figure I’ve got in my notes is 37% of GDP, significantly lower than the Eurozone average of 97% so Swiss debt break looks like it’s a winner. Table. I’ll analyze that in more detail, in in future, in a future episode, because it’s a little bit more complicated than than the Swiss debt brake. So I’m not 100% confident in recommending that at the moment. Okay, so to conclude, I think that debt ceilings are a bad idea. The critical thing is to get control of spending relative to revenue. I mean, one option is to increase revenue, to increase taxes, but then that comes with economic consequences. I’d prefer that governments get control of their spending rather than try to close a fiscal gap, try to cover a fiscal deficit by increasing taxes. However, the critical thing is, whatever they do, they need to get control of their budget, to get their budget back into the into black, and it looks like things well, the debt ceiling, it doesn’t really help with that, because of the adverse economic consequences that would flow from a government being unable to borrow money when they need to borrow money because of the deficits that are being run. The political leaders, the Congress, they will always vote to to increase the debt limit, the debt ceiling, and so it doesn’t really have an impact on on improving the situation. Okay, so overall, I think Trump’s actually right on this one, that the US debt ceiling is ridiculous, right? I’ll be interested in your thoughts on this episode. Let me know what you think. If you have any views on fiscal rules that that could be helpful, then please get in touch. Send me a note. Contact@economicsexplored.com. Okay. Thanks for listening.
Credits
Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.