By Neville Bennett The cash carpet-bombing is gathering pace, amidst cries of "There Is No Alternative", without concern of accumulating debt. The alternatives are to spend less now, raise taxes now, or change entitlements to health, welfare and retirement. Realistically, can governments spend less when unemployment is burgeoning? Realistically, can governments be expected to increase taxes, cut services and defer retirement benefits? Easier to pile up debt! The result could be called inter-generational theft. It is also future-eating. We are eating our descendents future by leaving massive debt. We are future-eating too in environmental matters; by allowing our rivers and air to be polluted; by being apathetic about bio-diversity and agnostic about global warming. Leaving aside my environmental concerns, and local New Zealand issues, this ariticle examines the international economic consequences of cash carpet-bombing.
British Debt The UK's national debt has risen to a massive â‚¤2.2 trillion, largely because it has taken responsibility for Lloyds Bank and Royal Bank of Scotland. The debt from just these two banks is eqivalent to 150% of British GDP; the highest level in that country since the 1950's when the UK still had war debts. Debt is also growing because the recession has cut tax receipts. Government expenditure this year alone may require borrowing of â‚¤150 billion. The Bank of England, the world's most active central bank, has unleashed a breathtaking plan to buy one-third of all long-dated gilts (fixed interest government securities) in order to increase liquidity in the economy and also lower interest rates right across the interest rate curve. This is innovative as most central bank interest rate setting applies only to short-term paper: the market sets the price of bonds. The bill for the BOE's experiment is the equivalent of another 5% of their GDP. I was reading D.E. Moggridge's incisive biography of Keynes this weekend, when I heard of the BOE plans. He would have approved. Faced with the need to keep Britain's recovery going in the later 1930's Keynes insisted that the authorities should avoid high interest rates as they would be hell-fire: "the long-term rate of interest must be kept continuously as near as possible "¦ to the long-term optimum. It is not suitable to be used as a short-term weapon" he said (Moggridge p.118). Stimulus packages An IMF study estimates that the fiscal balance of advanced economies will advance by 6% of GDP in 2008-9, and Government debt will increase even faster; by 14% of GDP , the largest ever increase in peacetime. The US package will spend $719 billion with an impact over 2009-11. All major countries have packages which usually combine tax cuts (about one third) and new expenditure. All boost infrastructural spending, and most increase spending on vulnerable groups. Tax relief goes mostly to individuals, but the US, Japan and Canada give relief to corporates too. The size of stimulus packages varies considerably. The UK was only 1.5% of GDP when the report was compiled. The largest is the USA at 4.8% GDP, followed by China at 4.4% and Germany at 3.4%. The average is 3.4%. The US and Canada need larger packages as they have smaller social benefits (for unemployment, insurance, training) in comparison to Europe. The US, UK, Canada, China, France, and Germany had fiscal space to expand spending when the crisis began because of relatively low public debt, deficits and interest rates. Japan, India and Italy had high debt and Italy and India had high interest rates. It follows that Italian and Indian stimulus packages are very small (0.3-0.5 % of GDP). The size of distressed financial institutions is decisive: gross debt has risen through support to banks by an average of 4% of GDP, but it is 6% for the US, 9% for Canada and 20% for the martyred British. But these stimulus measures will not have a large effect. Preliminary calculations are that although growth increased by 2% in 2008 and 2009, it could only rise by 25-50 points in 2010. Nevertheless overall G7 output is expected to fall by -2% in 2009. More stimuli will surely be demanded. Debt Repayment The IMF's "The State of Public Finances" observes that in the advanced G20 counties, public debt will increase by 25% by 2014. Moreover, there are substantial downside risks, including more finance bail-outs, and increased revenue losses as the recession deepens. In some countries, saddled with an ageing population, a demographic shock may cloud prospects. I believe it will be hard to fund these debts at low interest rates, and there is a possibility that rising rates will further destabilize banks and increase the cost of debt funding. In a prolonged slowdown, the IMF calculates a mammoth debt ratio of 130% of GDP for the rich countries. The IMF offers a four pillar strategy for fiscal solvency: 1. The packages should be temporary, not permanent measures. 2. Once economic conditions improve, fiscal adjustments should occur. It suggests reducing political interference by setting up fiscal rules, fiscal responsibility laws and independent fiscal councils. 3. There should be growth-orientated structural reforms to reduce debt ratios, including tax reforms improving incentives to work and invest; and removing tax distortions that may have added to excessive leverage in the past. 4. A clear commitment to lower fiscal pressures by reforming health and pension entitlement systems. Many countries have tried to anticipate the demographic problem of an ageing population by increasing age-related spending. The IMF calls for reforms that do "not set back efforts to stimulate the economy in the near term". Good economics but unrealistic politics The IMF clearly believes that the crisis is so serious that Governments have to do all in their power to stimulate the economy. It realistically assumes that a large debt will be incurred. It suggests that governments should stay focused on growth in the medium"“to-long-term to pay off that debt, even at the cost of welfare, and especially entitlements to health and retirement benefits. This is good economic counsel, but is politically utopian. No elected government would find it easy to slash health, welfare, and retirement benefits when debt can be increased. New Zealand will find that discretionary income in its export markets has shrunk for years. http://www.imf.org/external/pubs/ft/survey/so/2009/RES030609A.htm ------------- *Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR where a version of this item first appeared.