On one hand, debt overhang, secular stagnation and a “magic sovereignty” and in the other hand, a globalize world, global financial crisis, strong dependence among countries and fiscal policies as diverse as their own sovereignty. Having a direct impact on slow recoveries, financial instability and fiscal policies. It seems that there is not a coherent strategy to face sustainable standards of indebtedness and consequently on economy growth. Just to give some examples have a look at the following chartGovernment debt to GDP. on the correlation among debt and economic forecast growth for 2016. I have chosen countries with political- economic contrasts and with impressive differences in government debt in GDP. You´ll see that meanwhile USA has a 101%, China has only a 22,4%. Two different political-economic systems, one developed the other still an emerging economy, however a forecast economic growth of 6,8% for China and only 2,9% for USA. India is also another country with a high rate of growth of 7,8 and a manageable debt of 67,7%. Definitely, reduce public debt matters for increasing economic growth.
In countries hit hardest by financial crisis like Spain or Greece their levels of dependence with external debt and private debt has increased, as well as the tendency on the application of regressive fiscal policies. Indeed, particularly after the global financial crisis, external debt has increased worryingly without a plan of how to set up the correct reforms to make indebtedness a real aid to develop better services (e.g. infrastructures) and not a burden that prevent countries to achieve a sustainable growth. Public debt supposes another financial mechanism extremely helpful for the economy but in the context of a productive investment strategy, if not it become absolutely unsustainable and conditioning the whole government´s budget around debt.
Public debt supposes another financial mechanism extremely helpful for the economy but in the context of a productive investment strategy.
On other side, there is a confuse line between public and private debt that make the hilarious situation of transferring private into public. Particularly after financial global crisis this link becomes more evident as the bailouts have represented direct increases on public debt.
The lack of transparency in the process and high levels of corruption contributes to generate and increase debt and charges as public deficit, when is just private debt. Definitely corruption leads governments to be reluctant to invest, even in social areas like pensions, education or health. “Policy should focus on maintaining market liquidity through measures that encourage transparency.” Is not a coincidence that most of the countries with highest rates of public deficit in the Eurozone (Spain and Greece) have also high rates of corruption. In Spain, more than 50% of public debt comes from privates firms.
Sustainable economic development cannot be achieve without a specifically strategy on debt and not this compulsory tactic of applying measures without a global focus. Furthermore governments tend to justify this measures under the political speech that there are struggling for reducing public deficit, when the real origin comes for irresponsible behaviours of private sector that governments have generously included as general public debt. This is another point to deal with in a political agenda: the responsibility of two different budgets and two different responses on critical financial moments.
Is paramount to create sustainable mechanisms of indebtedness, if not stagnation and slow recoveries will be more than a temporary situation but with long lasting impacts (as it currently happening with cyclical unemployment). Hence, we need to design a long-term strategy with the following main points: 1) accountable and transparent controller mechanisms for the private sector. The role of the State would be of full responsibility in terms of justice system but not financially and what’s more, never included as public debt but only for economic analysis purposes of their impact on GDP. 2) One of the main goals would be the reduction of financial risk, in which financial regulation is one of the best mechanisms. Some authors have suggested instead, the application of macro prudential tools as the best choice because it adjusts dynamically as a difference to financial regulation. 3) Difference public spending from private debt, that supposes political management decisions that do not absorb private debt and proceeded by personal and institutional responsibility on them. Meanwhile public debt should only be considered around public deficit and external debt as a way to judge government´s performance and political-economic-financial decisions on the management of national budget.4) Is imperative to make structure reforms on fiscal areas and to harmonize it with other countries particularly in Eurozone region.
The current levels of low productivity and high indebtedness are unsustainable and need to be addressed by smarter political-economic decisions on the process to get sustainable levels of debt. Is the opportunity to be creative and make long-term strategic budget plans for the future in a foreseeable and coherent basis in which debt works to build a better Nation and not a whole political system at the service of indebtedness.
* Picture: Pont de Singe, Tatton Park, England was created for a biennial celebration by French artist Olivier Grossetête .The bridge is suspended by helium balloons. It was “theoretically” strong enough to hold a person, but the park didn’t take the chance.