Government Debt and Deficits Do Matter

The recent election of an anti-austerity government in Greece and its stubborn “negotiation” with the European Union is only one example of a tendency among politicians to pretend that government debts and deficits do not matter—or, at least, are of secondary importance. In this post I make the case that, from both a Christian and an economic perspective government debts and deficits (whether national, provincial/state or municipal) do matter.  Political-economics as God’s Steward includes a stewardly use of governments’ financial resources.

               Deficits, of course, occur whenever a government’s revenues (tax receipts) are greater than its expenditures—when they spend more that they receive.  The debt is the accumulation of past deficits[1]—the total amount of outstanding government borrowing. Deficits can be reduced and eliminated by cutting spending (austerity) or by raising taxes—neither of which go over well with voters (if they have not first been convinced of the necessity). In a growing economy, tax receipts will automatically increase as incomes and business profits increase; if government expenditures are at the same time restrained, deficits will be automatically eliminated—the hope and promise of most politicians!

The Problem

               The problem for Greece has been that this hoped for growth has not materialized. Rather, it (along with its Southern European neighbours-Italy, Spain, Portugal) has been an economic disaster zone[2] with high inflation, slow economic growth, stifling regulations and wasteful government ownership of industries. Politicians, for decades, granted excessive wages and benefits to overstaffed bureaucracies and employees of nationalized industries[3]. They subsidized failing companies and overregulated to protect high incomes from domestic and foreign competition. Government deficits were financed by “printing money”—borrowing from the central bank, creating massive inflation (averaging 17% a year from 1973-98) .  Joining the EU temporarily solved the problems and at least prevented politicians from further financing the deficits through “printing money”. 

               By 2008, the world-wide recession, it became clear that through various creative accounting techniques, the size of the actual deficits had been hidden and few of the reforms agreed to as condition for joining the EU, had been implemented.  In 2008, the EU and global financial institutions agreed to provide massive financial assistance (bailouts) but the payments were to be made in installments depending on adoption of specified reforms—including reducing the deficits. Since 2008 modest economic reforms were instituted and deficits reduced trough spending cuts and tax increases.  

               Implementation of reforms, however, brought demonstrators into the streets to protest necessary cuts. Moreover, a left-wing government was recently elected on the (economically impossible-to-keep) promise to reverse the trend—to reverse spending cuts and other measures agreed to with its debtors.[4] The new government, however, has collided with northern European politicians led by the German Angela Merkel who, not unreasonably, expect Greece to keep its promises! In Greece, politicians, who want to be elected, can, apparently, not take prudent financial action—particularly when the people have been brought up to believe that deficits don’t matter. Somehow, the people have been led to believe that it is the lenders—rather than former governments-- that have caused Greece to face hardship.

            Such sentiment exists also in Canada. While the federal government is close to bringing its budget into surplus, most of the provinces are still running major deficits. Some Quebecers, for example, recently planned to take to the streets in a “National Week Against Austerity” (which turned into a fiasco to due to a bitter cold spell)[5]. The protesters plan to make this coming spring a season of action (a la Greek protests). What’s the austerity they are protesting? The recently installed Quebec government is attempting to rein in spending, boost tax revenues and balance its budget by 2015-6. To do so, it is merely trying to cut the rate at which spending is growing—not even actual cuts! The province of Ontario, which has deferred the achievement of a balanced budget to 2017-18, has raised concerns of Moody’s, the credit rating agency, because of “its tendency to delay the most significant cost-cutting measures to later years.[6]
 
               At the federal level, the opposition is tending to downplay the importance of a balanced budget.  Liberal finance critic Scott Brison said the Conservative pledge to balance the budget in the coming year is "a political imperative, not an economic one.. It's pure politics.”[7] Neither, he or the Liberal Leader, Justin Trudeau, would say what they would actually do about the deficit. The NDP’s, Thomas Mulcair would also not clarify his position on deficit reduction.[8] The position that  “ the battle to slay the deficit was all about political optics, not economics” is also pushed by left-wing economists such as Jim Stanford, an economist with Unifor, Canada’s largest private-sector trade union and frequent panelist on the CBC. Canada’s deficits and debt, he argues, were among the lowest in the world.[9]

               Meanwhile, in the U.S., although president Obama has managed to reduce the federal budget to its lowest level since his first year in office, it still stood at $486 billion. Even, a budget proposed by the Republicans aims to reach balance only by 2024 while its authors claim the Obama budget process would still leave $700 billion by that year.[10] Even the Republican proposal deferring a budget balance for another ten years, further illustrates a “does not matter” attitude to deficits.

               In the rest of this post, I will seek to show that for Christians such a cavalier attitude to debt and deficits is unacceptable.

 

Indebtedness is a rejection of God's blessing

As a starting point, we should reflect on Deut. 15:6 where God promised the people of Israel that,

"the Lord your God will bless you as He has promised, and you will lend to many nations but will borrow from none"

To be free of national debt can, therefore, be seen as an indication of God's blessing. If we, as a nation, can live free of debt, are we not wilfully rejecting God's blessing by running continuous deficits and accumulating debt? Certainly, that applies to debt owed to foreigners. The Greek situation, with the government being dictated to by the European Union and the International Monetary Fund is an example of how dangerous being beholden to others is.

Increasing debt is robbing our children.

The Greek situation also shows that running continual deficits simply means that the payment of our current extravagances is being deferred to future generations. For years, politicians (and the citizens) lived beyond their means and an unwilling next generation is now called upon to pay the debt. Is that not in contradiction of the eight commandment? Prov. 13:22 teaches us that "A good man leaves an inheritance for his children's children". Would this word of wisdom not imply that it is unacceptable to leave one's children with a negative inheritance of outstanding debt?

That concern for future generations can also be derived from our stewardship role. John Calvin's explanation of Genesis 2, drew this conclusion:

Let him who possesses a field, so participate of its yearly fruits, that he may not suffer the ground to be injured by his negligence; but let him endeavour to hand it down to posterity as he received it, or even better cultivated.[11]

Surely that would imply that we should leave our country not only as good or better than we received it but that we should not burden it with a greater mortgage! 

Debt increases unemployment

Although many have suggested that we face a choice between fighting unemployment and reducing the deficit, economic reality is not that simple. Rather, high national debt may, in fact, be one of the major causes of unemployment. In the first place, government borrowing may "crowd-out" business borrowing. Secondly, the threat of future tax increases affects profit expectations. Both factors discourage business expansion and the ability to create long-term productive jobs. Which properly run business would voluntarily invest in Greece right now?

Government borrowing increases the demand for money and will, eventually, increase interest rates. Increasing rates will reduce business investment in new factories and equipment since some potential projects will no longer be profitable if they have to be financed at the higher rates. That is, government borrowing "crowds out" business borrowing. As a result, fewer new jobs are created. Moreover, since interest is a significant cost of doing business, domestic firms will, if they have to pay higher rates, be at a competitive disadvantage with their foreign competitors--again affecting job prospects. A reduction in real interest rates (after considering inflation), has significant potential for generating business expansion. On the other hand, if deficits go unchecked, the probability of continuing government deficits will tend to keep interest rates high.

            In addition, large deficits imply the threat of large tax increases in the future since--voluntarily or under pressure from international markets-- a government will, sooner or later, have to remedy the situation. Potential tax increases make both businesses and individuals wary. Businesses remain cautious about expanding--since higher future tax rates may make currently attractive investments unprofitable. Consumers remain careful in making long-term spending commitments since future tax increases are likely to reduce their incomes or even cause them to lose their jobs as businesses adjust to the tax impact.Removing the threat of future tax increases and high interest rates by rapid reduction of the deficit, improves business and consumer confidence. In turn, that confidence leads to increased spending and job creation. While the speed and extent of such a reaction cannot be predicted, it is clear that reducing deficits can encourage the private sector to create more jobs.

               Furthermore, a precarious financial situation also severely restricts the government's ability to fight unemployment directly. Although there is now, in general, a well-founded skepticism concerning the ability of governments to "fine-tune" the economy, continuing large deficits make the available economic tools even more ineffective. In disaster economies such as Greece, the levels of existing debt make stimulus spending impossible. Not saving for a rainy day in good times (running surpluses) means that hard times will be longer and carry a heavier cost. 

Thus, although the fight to reduce unemployment is critical, the Christian must simultaneously be concerned about the national debt and deficit.

Debt restricts our ability to deal with other serious problems

               Not only is our ability to fight unemployment hampered by past deficit spending, but so is our ability to deal with other serious problems. To meet our obligation to care for the weak in society, action is required to reduce poverty in Canada and the rest of the world. In Canada, we, especially, need to resolve the land claims and economic problems of our native population. Poverty in the Third World remains a major challenge--which continues to increase due to regional and tribal wars around the world and the massive refugee problem resulting from that. Moreover, preservation of God's creation requires action to improve our polluted environment.

Finally, national debt has been a major contributor to past inflation problems and has hampered our ability counter it. In a period when prices are already rising, government deficits increase total demand in the economy and cause more inflation. Moreover, the threat of future deficits maintains inflationary expectations and leads to higher nominal interest rates as savers seek to protect themselves from future inflation. In inflationary periods, proper fiscal policy should have removed purchasing power by increasing taxes or cutting government spending. Failure to do so, however, left monetary policy--increasing interest rates--as the only tool to fight inflation. Consequently, the Bank of Canada--the central bank charged with maintaining price stability--had to maintain an inflation fighting stance much longer and stronger than would otherwise have been necessary--with a significant negative impact on jobs[12]. 

Conclusion

It should be clear from the above, that deficits do matter. Christians should support those who take seriously the reduction of deficits. That, however, does not mean that we should seek to balance the budget in every year.  I hope to address that in the next post.

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RELATED POSTS

Choice of Economic Systems: A Conditional Preference for the Market—what does that mean?

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[1] When deficits are measured on a comprehensive basis. For this post, we ignore the current movement among provinces to focus on an “operational deficit” which excludes “capital” spending.

[2] See e.g. Herbert Gruble, “In defense of the euro and Merkel”, National Post, Feb. 19,2015, FP11. And Peter Schiff, “Borrower’s bravado”, National Post, Deb. 6, 2015, FP7

 [3] Much of this, particularly, the excessive nationalized industries, is, of course, contrary to the preference for the market which is my underlying theme, see Choice of Economic Systems: A Conditional Preference for the Market—what does that mean? Nationalized (state-owned) industries are inefficient. Their losses are covered by the government and, therefore, there is less incentive to employ only those who are really needed, etc.

[4] The Grecian situation is complicated by its membership of the Euro. With a free-floating currency, the Greek currency would drop in value in the face of the country’s economic disaster. The drop in value would encourage exports and attract tourists and thus create jobs. However, Gruble (note 2) predicts that in the long run Greece would again become a disaster zone, Like Argentina, it will “suffer perpetual inflation, deficits, devaluations, economic stagnation and deep political division.

[5] William Watson, “Quebexit”, National Post, Feb. 25,2015, p. FP9

[6] National Post, “Moody’s cool on Ontario’s debt plan”, Financial Post,p.9

[7] http://www.ctvnews.ca/politics/trudeau-dodges-question-on-running-deficits-1.2199217 re Trudeau’s speech in London, Jan 21,2015

[8] “Mulcair unveils NDP plan to goose the sputtering economy”, http://news.nationalpost.com/2015/01/27/mulcair-unveils-ndp-plan-to-goose-the-sputtering-economy-tax-cuts-for-small-business-and-manufacturers/ 

[9] Jim Stanford,“Canada’s deficit drama is all theatre” ,The Globe and Mail, Jan. 29 2015,
[10] Paul Kane and Reid Wilson “GOP budget sets up fight between deficit hawks and defense” Washington Post, Mar. 17, 2015, hawkshttp://www.washingtonpost.com/politics/house-republicans-try-to-rally-caucus-to-pass-fiscal-outline/

[11].John Calvin, Commentaries on the First Book of Moses called Genesis, translation by J. King, Eerdmans, Grand Rapids, 1948, p.125.

[12].The OECD in its 1990/1991 survey of Canada, for instance, noted "Although a stringent monetary policy was unavoidable...upward pressure on interest rates...might have been less strong, had the fiscal stance been more supportive of the Central Bank's disinflation policy".