The US debt ceiling mess shows why a Fiscal Council is a bad idea

The failure of even the non-partisan Congressional Committee of Budget in preventing the debt cliff-edge has lessons for India

- INDIRA RAJARAMAN

Treasury bills issued by the federal government in the United States, the ultimate in guaranteed assets, are held by central banks the world over, including the Reserve Bank of India. But the US Public Debt Act restricts Treasuries to an aggregate absolute ceiling, which can be raised only through legislative amendment of the act. This periodically triggers an excruciating bargaining process if the legislative majority is held by a political party opposed to that in executive power. With the possibility of a US default on Treasuries if the ceiling was not lifted by June 2023, a purely internal political face-off in the US became a serious threat to stability in global financial markets.

The US alone still clings to the arcane practice of defining debt limits in absolute terms. Since comparisons of public debt levels across countries or over time within a country have to be related to debt servicing capacity, absolute public debt is always normalised by the gross domestic product (GDP), at currency values of the relevant country/year.

An absolute debt limit, when reached as in the US, implies that no additional borrowing is permissible even for servicing pre-existing debt. That was the conundrum facing the US until a political agreement was finally reached with a few days to spare. Whereas debt measured as a percent of GDP allows for borrowing to pay interest, even while maintaining debt at the inherited percent of GDP, provided the GDP denominator has grown commensurately in nominal terms.