I’ll be a little provocative: I don’t really care how deep this year’s public finance deficit will be.
We drank too much and now we have a headache. And as when we reach for the aspirin, it almost doesn’t matter if there will be one, two or three pills in the pack. What matters is that we don’t want another bad hangover a couple of years from now. Or, put another way, we need a sustainable system of managing public fianaces.
Growth is important
Economists are now focusing on how to kick start growth. They expect to “somehow take care” of the debt afterwards. Now one has come up with a plan of how to curb the deficit in the long term.
Recessions will come and go, but we should try to prevent them from escalating into crises. Let us focus on the things that really matter most: the political concept of constantly increasing the state debt. The existing system makes that difficult to avoid. Here are five reasons.
The first is the apparent low cost of a debt: Who would want to raise taxes? Who would want to lower retirement payments? No one who ever wants to be elected. That’s why the difference between state income and state expenditures are usually resolved through a debt that only bothers a few analysts, who will surely not organise a protest or a hunger strike because of it.
The other reason is best illustrated by a pub, whose patrons have been told that their bill would be paid by their sons and daughters. Such a system always leads to unwise but, of course, very understandable drunkenness and gluttony.
The third reason behind the tendency to build up debt is the EU’s Stability and Growth Pact, approves a 3% deficit, which is in many ways pro-cyclical.
The fourth reason is the Friday night syndrome and the resulting Saturday morning hangover. On the sixth morning of the week, we all promise ourselves we will be good, only to forget these promises the following Friday. Budgetary discipline cannot be enforced.
And finally, the fifth reason why we amass debt: the paradox of loan-funded growth. If a family takes out a loan, no one says it suddenly became rich. But if a state does it, the politician responsible is applauded. Everyone sees the loan-propelled GDP growth, but everyone seems to ignore the growing debt that accompanies it.
In the past years, we saw surplus everywhere, but reasonable budgets were hard to find.
We need new rules. Maybe we economists should go on strike and demand, at least, a balanced budget!And maybe we should threaten to go on hunger strike unless the state creates budget reserves in times of rapid growth for times when the economy experiences problems.
Mission possible: surplus
The goal is to pay off the state debt as quickly as possible. There are many ways to go about this. I am proposing three.
The first is political. The new dynamic rule of the Stability and Growth Pact. Instead of the static 3%, let us agree that the sum of the deficit and the GDP growth must not be more than 4%.
The second is static. Let us create a new definition of GDP, from which we will subtract the deficit for that year. No politician will thus be able to win an election because of steroid-boosted economic “growth”.
The third has to do with society. Let us not insist on growth at all costs and instead focus on lowering the debt at all costs. Let us agree on a goal of 1% GDP growth and use any surplus to help pay off the debt.
So long as we only focus on maximum growth, sooner or later, the debts will drive us to bankruptcy. Countries should stop competing among themselves over who can artificially drive up their growth the most. Why don’t the compete over who can pay off their debts sooner. Those able to lower their state debt to a reasonable level (let’s say from the current average of 70% to 10% of the GDP), can then refocus their energy on growth again. Growth is it is not boosted by debts.
Spending too much?
And the most important for last: Let us make sure that all of these rules can be enforced – something that is lacking right now. Why not decide that any politician who breaks any of these rules will lose half of his salary (he is not doing his job well!), his government car (he can ride the bike, a tram or the train) and rep-refunds. He could then symbolically give the money thus saved to help start paying off the debt.
I was quite surprised at the reactions to my article in which I tried to lighten (the very serious!) role of us economists. The discussion was fun, but it’s more important to talk about this now! Or else a few years from now, we really will need to go on hunger strike.
The author is the chief macroeconomic strategist at ČSOB.
