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Should the UK copy America and introduce a debt ceiling?

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The US is on the brink of hitting its so-called debt ceiling and potentially defaulting on its debts unless Congress approves more borrowing.

The law was designed as a check on the president but, with a polarised Washington, Republican politicians have used the deadline to make demands on Barack Obama. 

The political blackmail has seen the US credit rating downgraded with legendary investor Warren Buffet just one of many lashing out at the debt ceiling concept as a “nuclear weapon”.

Considering the chaos and brinkmanship it may surprise you that Treasury financial secretary Sajid Javid tabled a private members bill to impose a UK debt ceiling in July 2011 when he was a backbencher.

The National Debt Cap Bill planned to create a legal cap on the amount of outstanding net Government debt as a percentage of gross domestic product.

The debt ceiling would be set by the Treasury at a future date and Javid recommended a 40 per cent level coming into force in 2021.

Javid made his pitch during the last debt ceiling crisis in June 2011 when Standard & Poor’s downgraded the country’s rating.

On the Conservativehome blog, he wrote: “America’s debt ceiling has taken it to the economic precipice. This is both deliberate and welcome.

“Few things are as effective as a looming crisis in getting politicians to act. It is precisely this prospect that has spurred American political leaders into action. They have no choice but to openly debate America’s out-of-control national debt and take immediate action.

“This is exactly why Britain needs a debt ceiling too.”

The bill was withdrawn before second reading and Javid was later promoted to Treasury economic secretary and this month to Treasury financial secretary.

Conservative MP Steve Baker, who supported Javid’s bill, believes a debt ceiling could still work in the UK without the political dysfunction of America.

He says: “US political polarity has been amplified by the constitutional separation of powers and led to inaction. In the UK where power is legitimised by the House of Commons there are constitutional reasons why we would not have the same difficulties.

“The degree of dysfunction would not occur because if the Prime Minister decided to raise the debt ceiling with an Act of Parliament then the whipping system would make it happen. That is the practical reality whereas in the US they have two powerful assemblies with separate executive.

“What a debt limit would do is focus minds on how the debt was expanding. In practice a UK debt ceiling would undergo exactly the same process as in the US, where it has been raised every time it is necessary.”

Labour MP and Treasury select committee member Andy Love says debt ceiling has a debilitating impact on the US as all sides go to the wire on negotiations.

He says “Not only is there the cataclysmic uncertainty as we get closer to default but the whole credibility of Government and its economic policy. It’s difficult to recommend what they have in the US for any other country and I find very little to commend the idea of a UK debt ceiling.

“It doesn’t have any benefit in raising the profile of public expenditure but it certainly has the impact of raising gridlock and putting uncertainty at the centre of Government.”

There is the potential benefit of a regular debate over debt levels to focus public minds but the US political chaos means this idea is unlikely to return to the table any time soon. 

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  1. The last thing we want to do is to emulate the USA in anything at all. rather let them learn from US. Just remember it was largely their doing that we had the banking crisis.

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