AS I SEE THINGS: Government spending and public debt
It is no secret that a strong relationship exists between the level and rate of growth of government spending and a country’s accumulation of public debt.
Put simply, once government’s spending exceeds its intake of revenue (from all sources) a financing gap develops which can only be filled through borrowing. As the government’s borrowing increases, the level of indebtedness also rises.
Some critics have argued strongly that the amount of public debt a country accumulates is not necessarily a problem. The challenge comes if the country is unable to fully and consistently service its debt.
But clearly, is there not a direct relationship between the amount of debt a government accumulates and its ability to meet its debt obligations? I would certainly think so.
Therefore, if a government does not see its outstanding debt as a problem, then, logically, it may very well show little commitment to reducing the level of public debt. And that situation should be a major concern for those who hold the opposite position that too much debt can be a real burden on society from several perspectives; most noticeably in relation to holding back economic growth and development.
Against this backdrop, it was particularly surprising to hear the president of the United States playing down the huge level of national debt now facing his country. In Mr Obama’s opinion, the fact that America currently owes over US$17 trillion in debt is not a major area of concern since the debt is not unsustainable.
But how could that be when there is no clear plan in place to halt the continuously increasing federal budget deficit?
Even if history proves President Obama right, many of the people in Europe could only wish that a similar situation existed there. Countries such as Greece, Spain, and Portugal just to name a few have found out the hard way that massive governments’ spending and the accumulation of huge amounts of public debt will eventually become a major problem and corrective remedies then have to be sought. History would show that these remedies often hurt individuals, sectors, and the economy as a whole.
Like the developed world, Caribbean countries too find themselves having to grapple with the negative effects of high government spending and public debt accumulation. The most recent example is that of Grenada’s failure to meet its coupon payment on public debt that it has already rescheduled.
Besides the fact that Grenada’s credit rating has been downgraded as a result of its announced default, the rating agency is also alluding to possible implications for the Eastern Caribbean Currency Union of which Grenada is a member.
Like the European experience, once a country is part of a monetary union, adverse economic conditions in that country could have lasting negative fallouts for other member countries.
And that is why every member of a monetary union should adopt fiscal discipline as a key component of its overall macroeconomic management strategy.
To sum up, public debt, if not managed effectively, will eventually become unsustainable to the extent where the government will not be able to meet its debt service requirements.
Given the nexus between government’s spending and debt accumulation, a reasonable starting point to ensure debt sustainability would be to reduce the level of public expenditure or lower its rate of growth.
Otherwise, countries (developed or not) will forever be burdened by excessive debt and miss out on opportunities for economic transformation.
• Brian M. Francis PhD is a lecturer in the Department of Economics at the University of the West Indies, Cave Hill Campus.