What would happen if ...
WE DIDN'T INDEBT OUR FUTURE?
OUR CURRENT GOVERNMENT DEBT
The future has no voice. It is a strange irony that most parents profess to wanting 'to leave their kids something' - but at the same time, in a perverse paradox, perceive no issue in collectively indebting those children and reducing their ability to fund the services of the future in order to preserve the current borrowed lifestyle.
Even during 'normal', non-crisis years we are quite happy to maintain deficit spending rather than tailoring our available services and government spending to be logically constrained to the same level as the tax take levied to provide them.
The old wisdom requiring us to cut our coat according to our cloth appears a trite novelty of the past - the ability to borrow off the future is readily available, and the services can be drastically reduced then instead, as they pay the piper for our profligate extravagance now. After all, the future generations require no pandering - they have no vote to be be cajoled or voice to be quietened. They can be freely encumbered with the debts we incur now with impunity, and there is political expediency in doing so to placate the desires of the existing electorate.
I think it can be no better said than in a recent quote from The Retirement Policy Research Centre's Susan St John and Clare Dale¹:
Policy development and implementation requires a long-term perspective not a three-year election cycle which encourages a short-term bias where vote-maximising politicians have strong incentives to discount the future
Even at this time when the financing costs are at a historical low, we in NZ are now anticipating that the servicing of past government debts will exceed all the money available for the entire education budget. Think about that ... slowly. How much more would be available if the we live within our means and not burden the future with debt to prop up a falsely generous existence.
It is clear that the future generations need some degree of formal constitutional protection to prevent their wilful impoverishment.
Europe realised the evil for governments in the temptation to indebt the future for current benefit when it created its Excessive Deficit Procedure (EDP). Sadly, it then let its politicians step around it. Greece was the first to notice the subsequent folly of irresponsibe governance ...
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EXCESSIVE DEFICIT PROCEDURE (EDP)
The EU's Stability and Growth Pact (SGP) is a body of rules governing the coordination of EU countries' fiscal policies. It aims to safeguard sound public finances and has two arms:
- The preventive arm ensures EU countries' fiscal policy is conducted in a sustainable manner.
- The corrective arm lays down how countries should take action in the event that their public debt or budget deficit is considered excessive.
The excessive deficit procedure (EDP) is governed by Article 126 of the Treaty on the Functioning of the European Union. It underpins the corrective arm of the EU's SGP.
EU countries must demonstrate sound public finances and meet two criteria:
- their budget deficit must not exceed 3% of gross domestic product (GDP);
- public debt (government debt & that of public agencies) must not exceed 60% of GDP.
Every April, euro area countries submit stability programmes to the Commission and Council, while non-euro area countries submit convergence programmes to the same institutions. A stability or convergence programme must include the country's medium-term budgetary objective (MTO), and information as to how this will be achieved. It also contains an analysis of the effects of changes in the main underlying economic assumptions on the country's fiscal position. The programmes are examined by the Commission. If the criteria are not met, an EDP is launched by the Council based on recommendations by the Commission. The EDP requires the country in question to provide a plan of the corrective action and policies it will follow, as well as deadlines for their achievement. Euro area countries that do not follow up on the recommendations may be fined.
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SO WHAT WOULD HAPPEN IF ...
WE CONSTRAINED GOVERNMENT SPENDING TO GOVERNMENT INCOME, EXCEPT IN TIMES OF TRUE CRISIS?
Government deficit spending on non-investment items in 'normal' years were constitutionally constrained (for example, to less than 0.5% GDP). Any greater deficit spending only allowable in times of true crisis (GFC, Christchurch earthquake, coronavirus pandemic and subsequent depressions) with a bipartisan 75% vote required of the crisis government for each initiative in these circumstances.
June 2020
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References
¹ original article
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