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Tomáš Sedláček: There and back again, or the asymmetry of debts

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If you look at the public finance budget, you will see an unhappy future. The less the state collects in taxes during the economic crisis, the more it seems to be spending on social services. A massive deficit will result.

Just to maintain the already high deficit, which is right now around CZK 150 billion, the government will need to slash spending by CZK 60 billion this year and CZK 90 billion the following year. It will hurt, it will deepen the crisis, but there is no other way.

These measures will affect people who have up until now not felt the effects of the crisis: doctors, teachers, administrative workers, members of the army. It wouldn’t need to be this way if the state had sufficient savings. But that is not the case.

Janota’s savings measures are bold, unpopular and necessary. It will not be easy to gain support for them. But even if we adopt these measures, the public debt will increase from the current 30% to 40% by 2012. And the deficit, which we were able to reduce to 1% of GDP in 2007, after years of tough battles, could reach 4% in 2012.

I won’t even try to describe the horrific scenario that would unfold if Janota’s savings measures are not adopted. The debt would reach half of the GDP, and the annual deficit would hover around 6%.

Speak only well of Clinton
Besides inflation, there are two other ways to reduce the debt. We will either “outgrow” the debt or pay it off by developing a budget surplus.

The first option: In order to reduce the debt from, say, 40% of GDP to 20%, we would need 23 years of 3% annual GDP growth. And we would need to not accrue any further debts.

The second option is having a budget surplus. But to keep the deficit balanced at 4% of the GDP, we would need to increase tax revenue by one-tenth. Or reduce spending by the same amount.

But we need a surplus! If we want to get to the original level of debt (30% of GDP), we would need to have a 2-3% budget surplus for three years …

The administrative government should focus on the process of creating a budget and come up with sanctions for not adhering to it, and make a plan for public finances until we are able to get the debt back down to 30% of GDP. Finally, it should also adopt measures in several phases. If the debt is low (say, up to 20% of the GDP), then politicians can spend lavishly and travel in helicopters. But if the debt surpasses, say, 40%, let’s ban politicians – maybe with a few exceptions – from driving state cars (we’re trying to save money, so get on a bike or use public transport …).

If the debt surpasses half of GDP, expenditure limits should be significantly reduced and this would need to include ministry spending.

It is necessary to get rid of the new debt as quickly as possible. Or else the next crisis could really cripple us. Where should Europe seek inspiration? Surprisingly, in the United States.

The Clinton administration had to deal with huge public finance deficits in 1993. But his administration proved that the economy can recover from a recession and that, at the same time, it’s possible to reduce the deficit. All of Clinton’s budget measures combined tax redistribution and budgetary discipline. At the end of his term, for the first time since 1947-49, the US budget had a surplus for three years in a row.

If good times come
It is uncertain whether it would be possible take the Clinton route here. It would require strong political support, growth and politicians with charisma. Clinton had several factors working in his favour, but the most important was his political will. And that is something that Europe has been lacking for a long time.

So let’s not criticise Minister Janota for trying to save. Let’s criticise the previous ministers for not being responsible. Let’s blame the MPs for not being able to understand the basic principle that during times of prosperity you must save up for leaner days.

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