To my brother, Jade Stephen: may you have the happiest of birthdays today. I hope you enjoy this attempt to further assuage the public’s appetite for an explanation of public debt.
All my life I’ve been hearing that government borrowing is inherently bad. My education in economics has allowed me to move away from that rigid position. My take is twofold: (1) it depends on where the government acquired the loan, and (2) where and how it intends to spend the proceeds. A caveat to the second point is that the target of that expenditure must be properly monitored and evaluated.
I’ve been jokingly referring to the Governor of the Central Bank of Barbados as the Cheshire Cat. Believe me when I say it wasn’t for any fabled mischief. I simply saw him as being awfully pleased with the outcome of the report. I side with others who question unemployment data in general, to the point that we sometimes think the analysis was done in Wonderland. I’ve written about this in previous articles and may go further in future.
I do think he did the government a disservice during his most recent press conference. In my view, he did not sufficiently weigh the pros and cons of the government’s debt-reduction strategy. His team may feel he has covered it in his “down-to-earth” social media programmes. Those are widely broadcast, but they are neither viral nor timely enough to provide context for what he says in those press conferences. In other words, the public mood seems to disregard, or at least disconnect, his media appearances from his social content.
That is unfortunate. This most recent report on the economy indicated that debt-to-GDP figures are now at or about 100 per cent. That figure means that if the country decided to use all the income it produced in a year to pay off the debt the government still owed, it could do so with nothing left over. That is infeasible, of course. We need that income to circulate as payments and purchases on other priorities. You know that you aren’t going to take all of your income in a given year and pay off the bank for your car loan. The same thinking would apply at the country level.
Debt-to-GDP ratios are simply indicators that remove the effect of a country’s size on its ability to afford the debt its government acquires and uses. We inherently understand that the Government of Trinidad and Tobago should be able to borrow more than its counterpart in Barbados. Its economy is larger and the government earns more tax revenue, regardless of the tax types and rates charged. Therefore, an investor (foreign or otherwise) could find it simpler to lend, say, US$10 billion to the Trinidadian government. There is more economic activity and, therefore, there should be larger tax revenue. The investor hopes that translates into affordability, provided the government manages its finances well.
Investors, both foreign and local, still want a simpler indication of affordability without all the guesswork. Debt-to-GDP figures allow for that, as dividing public debt by GDP de-emphasises the size of the country in the analysis. By looking at those figures, it is as though every country is being judged “equally” on its ability to afford public debt. Comparing the indebtedness of countries is easier this way — the larger the number, the greater the debt burden the government is placing on the society.
Here is the real issue: economists generally agree that small open economies need to maintain some level of public debt. This is especially true once the scale of a country’s economic activity is considered. Some small open economies prioritise quality of life over aggressive productivity. That means the government often seeks financing to provide social safety nets. In a fair world, taxation would be the primary source. Sadly, many small open economies are dominated by very seasonal industries — tourism, in Barbados’ case. As a result, the bulk of tax revenue is exposed to two problems: (1) although it lags the revenue in those industries, tax revenue tends to follow the same seasonality; and (2) total tax collection is impeded by inefficiencies common to small open economies, along with the constant threat of capital flight. Investors are a timid bunch when it comes to small open economies, and one cannot blame them for protecting their interests in what they perceive to be high-risk environments.
Governments in these economies therefore find themselves as the lead entity chasing investment. They take up the mantle of both export and investment promotion because the private sector does not, on its own, have sufficient resources to do so. We can agree that such governments face immense challenges in steadying their economies. I have not even mentioned that small open economies often lack competitiveness in many of the industries in which they compete, for the very reasons already described. Moreover, in line with their mandate to provide social protection, the public sector has constant expenses that do not match the timing of when tax revenues are actually earned and paid in.
If your household had similar challenges, on a smaller scale, you would know how to manage it. If your income only came in for six months of the year while your bills were monthly, you would borrow for some part of the year to make ends meet. Even if your annual income exceeded your annual expenses, prudence would still involve borrowing, because of the uncertainty associated with seasonal income. Borrowing can also allow you to save more effectively over time.
Governments borrow for much the same reasons. The economic behaviour of the leading industries does not always support the large outflows government has to make. One only hopes there is substantial benefit to be derived from that spending. That is why governments borrow for large-scale capital projects and to support them. It is also why they borrow for social programmes. The irregularities and inefficiencies associated with small open economies make such borrowing necessary.
Economists generally accept, then, that small open economies are wedded to debt, and that the real concern lies in the terms of borrowing. We in the Caribbean have, over time, been subject to predatory behaviour on the part of investors, both local and foreign. We have also witnessed similar tendencies in government. In the end, it does not matter what the headline figures say if we cannot bring meaningful control to these issues. We will continue to be stuck in a rut that is all too familiar.