WASHINGTON — With public finances in disarray following the financial crisis, recent political debate in Europe and the United States has focused on national debts. The ongoing crisis in the eurozone and daunting government deficits in the United States have added a sense of urgency. As the United States reaches its statutory debt ceiling and Europe seeks to prevent further debt crises, balanced-budget amendments, spending caps, and other debt-limiting proposals are under active consideration on both sides of the Atlantic.

Like Odysseus, who ordered his men to tie him to the mast so he could not be lured by the Sirens, some policymakers are proposing to tie themselves (and their successors) to stricter fiscal rules. The effectiveness of such proposals is being vigorously contested, with some seeing them as the only way to reign in growing deficits and others fearing the loss of legislative independence and needed fiscal policy tools in the future. The problem seems clear: if fiscal rules are introduced, they need to be strict enough to have an impact, but at the same time flexible enough not to limit future policymakers in times of economic downturn.

Proposals advocating strict and legally binding fiscal rules are not new. In the 1990s, in Europe, countries that entered the European Monetary Union agreed to the Stability and Growth Pact, which included a commitment to an annual budget deficit no higher than 3% of gross domestic product (GDP) and a national debt lower than 60% of GDP. Germany and France as well as a number of other countries have at different times broken these rules. In 2009, German political leaders went a step further in their attempts to “tie themselves to the mast” when the grand coalition introduced a “debt brake” into the German basic law. This constitutional amendment limits the federal structural deficit to 0.35% of GDP from 2016 on and does not allow the federal states to run any deficit at all after 2020. France and Spain have signaled an interest in adopting similar rules, but economists still disagree whether such stringent laws can be successfully exported.

Balanced-budget rules are not limited to Europe. In the United States, a vast majority of states have some variation of balanced-budget requirements. At the federal level, such measures have been introduced and discussed several times and have now, together with proposals on binding spending caps, resurfaced during the debate about the debt ceiling. The statutory debt limit itself differs from balanced-budget rules as it focuses on the overall debt and not annual deficits. But some members of Congress have signaled that they will only agree to raise the debt limit if a balanced-budget amendment is passed simultaneously. Others are demanding spending cuts as a prerequisite for their vote to increase the debt limit. The debt limit has thus become less of a fiscal rule and more of a political tool in a debate between liberals and conservatives over the role of government.

According to U.S. Treasury Secretary Timothy Geithner, the United States has nearly reached the current debt ceiling of $14.29 trillion but can extend it by implementing “extraordinary measures” until around August 2. There is little to no doubt among experts that raising the debt ceiling is economically necessary and will have to happen. Mark Zandi, chief economist at Moody’s Analytics, describes a failure to raise the debt ceiling as knocking out the cornerstone of the global financial system, namely “that the United States will make good on its debt payments.” Given that the debt limit has had to be raised ten times since 2001, political debates around the votes are not new and have previously been used by the opposition party to embarrass the administration. Then-senator Barack Obama himself voted against raising the ceiling in 2006, calling reaching the limit a “sign of leadership failure.” Still, today’s apparent determination on the part of some policymakers not to allow an increase under any circumstances makes the current situation more precarious. Despite the urgency of the situation, the debate about the debt ceiling has been merged with the broader political discussion about current and future U.S. budgetary policy. The debt ceiling is thus neither preventing the buildup of debt, nor helping to foster constructive policies.

Historically, most fiscal constraints have been circumvented and, in the end, proven to be ineffectual. Constitutional amendments, like the German “debt brake,” might prove to be more resilient, but, until they are tested during an economic downturn, this remains to be seen.  Either way, the economic wisdom of such amendments is doubtful. Finding solutions to the long-term challenges of public finances will require major political decisions, for example on the future design of social programs, levels of national security and public investment spending, and overall tax rates. These decisions will profoundly impact the future shape of societies and economies. They are inherently democratic choices. And budget rules will not produce sustainable and viable results without public engagement and understanding of what is at stake. Instead of passing the buck to future politicians (who may find ways to circumvent the rules), today’s policymakers and the public need to engage in a serious political debate about these issues now. Tying oneself (and future policymakers) to the mast of binding fiscal rules dodges tough decisions or abdicates the responsibility of actual political decision-making.

Peter Sparding is a Program Associate in the Economic Policy Program of the German Marshall Fund.

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