2023-05-27 05:31:32
In Canada, is there a pre-established debt ceiling as is the case in the United States, a subject that seems to worry the stock markets and the entire American economic system? THANKS.
John Robitaille
There is no law in Canada similar to that of the United States that sets a debt limit for the federal government. Many deplore it, because nothing prevents Ottawa from increasing its debt practically indefinitely, as it has done in recent years. The consequences of excessive indebtedness can end up preventing a government from providing essential services to the population, in addition to placing the burden of its expenses on future generations.
Countries that limit the borrowing power of their governments are rare. Apart from the United States, the only other known example is Denmark. Is this a good thing? It’s a two-edged sword, as we see today.
In the United States, the law which limits the indebtedness of the government exists since 1917. It was passed by the Congress to gain the support of its members reluctant to the idea of the United States participating in the First World War. By limiting the amount the country could borrow to finance the conflict, it was possible to obtain the support of the reluctant.
The law was subsequently amended and the debt ceiling was increased multiple times to allow the country to take on increasing responsibilities, such as social welfare and public health.
When the debt ceiling is about to be hit, Congress needs the agreement of the House of Representatives to raise it or suspend it temporarily, which has been done without too much trouble a hundred times since the law exists.
In recent years, the debt ceiling has become a political battleground. When the party in power in the White House is in the minority in the House of Representatives, as is currently the case, the situation can degenerate. This is what is happening right now.
Before giving their agreement to raising the debt ceiling, the Republicans are demanding that the government cut public spending to curb the increase in the debt, which is deemed unacceptable by the administration of Joe Biden, who proposes instead to raise taxes on the wealthiest, which is considered equally unacceptable by its opponents.
This dead end in the negotiations between Democrats and Republicans is turning into a crisis as the deadline for the debt ceiling draws closer. Without compromise, the US government will no longer be able to pay its bills or interest on its debt on June 5, according to the latest date published on Friday. Not only would a default by the largest economy in the world have dramatic consequences for the United States, but the entire global financial system would be shaken.
Its impact could be even worse now, when uncertainty about the evolution of the global economy is great and investors are nervous.
There are solutions to prevent such a crisis created from scratch from happening again, according to Desjardins economist Francis Généreux. The U.S. Constitution indeed provides that “the validity of the debt of the United States shall not be questioned,” whether by debt ceiling law or otherwise. “The White House and the Treasury could thus legally challenge the constitutional conformity of the legal debt ceiling,” he underlines in a recent analysis.
Until now, no government has wanted to use the Constitution to prevent the recurrence of debt crises.
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