A debt ceiling, recently usually referred to as a debt brake, is a ceiling set by the constitution on public debt. A debt ceiling aims to guarantee the long-term stability of public finances as well as a higher degree of intergenerational fairness.
A debt brake was introduced in Germany in 2009 and is anchored in article 115 of the constitution in the form of a ceiling for net new public borrowing. The article stipulates that the federal budget deficit can only amount to a maximum of 0.35% of gross domestic product as of 2016 (structural deficit). The German Länder may not incur fresh debt as of 2020; in other words, they must have eliminated their structural deficits by then. Deficits caused by the business cycle are not covered by the new debt ceiling. The debt brake's predecessor was the "golden rule" according to article 115 GG, whereby newly borrowed sums were not supposed to exceed expenditure for investment, other than in cases where there was an overall economic imbalance.
In the USA, a debt ceiling for the federal budget was introduced in 1917 to enable more flexible management of public debt. Prior to this every new debt had to be approved by Congress. The debt ceiling refers to overall debts and has been changed almost 80 times since 1960. In August 2011 it was increased from USD 14.3 billion to USD 16.7 billion.
In Switzerland the debt ceiling currently in effect has been enshrined in the constitution since 2003. Debt has to remain constant for longer than one economic cycle. The debt brake is composed of a rule on expenditure, an adjustment account and special rules. This makes it more complex than the instruments used in the USA and Germany.
In September 2011 Spain also agreed to embed a debt brake in its constitution. As of 2020 the public sector deficit must not exceed 0.4 percent of gross domestic product and will apply to the central government in Madrid and to regional governments alike.
The introduction of similar regulation looks likely in other EU countries. On 9 December 2011 the state and government heads of the euro countries decided that all countries in the Eurozone should introduce a constitutionally mandated debt ceiling. This should mean that the structural deficit of a state as a whole should not exceed the upper limit of 0.5% of gross domestic product. Such a debt rule would closely correspond to the current debt ceilings in Germany or Spain.
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