For a long time, during discussions on government debt, both the ruling and opposition parties have put their partisan positions before analytic study. We have seen little refined economic debate on the many misconceptions about the issue itself.
The government is indeed facing a tight financial situation, which has already created a structural imbalance -- tax revenues account for an increasingly lower proportion of spending, resulting in a continued accumulation of public debt. The biggest after-effect of unhealthy finance is in the damage to policy priorities that makes them no longer reflect what the people want or what the auth-orities have planned. Because this aspect involves financial discipline in the government's use of public resources, large-scale reforms will be a matter of course.
However, such reforms are very different from adopting expansionary fiscal policies (increasing government spending, for example) or floating debt.
First of all, let's talk about the specious notion that by floating debt we will "leave debt to posterity." Many people fear a debt buildup in the public sector. Some of their fears have a basis but others don't. In an example of the former, Adam Smith said more than 200 years ago that one won't be too careful when spending someone else's money.
In today's economic jargon, this becomes: "The public sector yields far lower returns than the private sector in the use of resources." In other words, if the government controls or uses an excessive amount of resources, efficiency will definitely be hurt because the private sector can produce more by using the same amount of resources. This is also the primary argument used by many advocates of small government. They want to restrain the government's activities by limiting its ability to raise funds or float debt, so as to express their distrust of a "fine-tuning" economic policy.
In contrast, the notion of leaving debt to posterity cannot stand up to theoretical test. Expanded government spending through the issue of bonds may help economic activities, but it may also be fragmentary and futile. In the former case, future generations will be inheriting assets with a certain scale of productive functions -- in addition to the debt. The two will offset each other and there won't be big problems.
Interestingly, even if expanded government spending turns out to be futile, there is simply no cause for worry about "leaving debt to future generations." This is because most government bonds will still be held by the country's citizens. Even after trading and inheritance, it will be simply another group of the "future generation" holding the bonds. For them, obtaining government bonds (including income from interest) means wealth, not debt.
Of course, trading and inheritance only means a change of ownership. They neither increase nor decrease the aggregate wealth of the entire economy. So we can't say government bonds are a real "burden." In fact, the macroeconomic debate on government bonds is about whether they constitute wealth that belongs to the people.
There are also calls -- based on doubts about governmental ability to repay debts -- to limit the room for governments to float debt. Economic theory tells us that governments are entirely capable of repaying government bonds denominated in local currencies. This is because governments can lower the actual public debt by printing currency notes and creating inflation. Of course, the situation would be entirely different if most of the bonds are denominated in foreign currencies and held by foreigners. In that case, the debt will definitely become a humiliating burden once the state fails to meet the claims.
For business enterprises and individuals, the way to handle economic difficulties is to cut costs and spending. But states facing economic decline need to cut taxes or increase government spending. Otherwise, more unemployment and further economic decline will result. This is the real "burden."
From a short-term perspective, the debate on expansionary fiscal policies should be focusing on whether the projects funded by such policies are "necessary or efficient," and whether there are other alternatives. From a long-term perspective, the debate should focus on whether the policies will affect savings rates and economic growth.
An even more fundamental question is about the state's role in the economy, or the debate between big government and small government. Instead, we are now discussing whether we will "leave debts to posterity," or even opposing expansionary policies on the grounds that much of the government spending is lost to corruption or wasted. Such arguments obscure the focus of the debate.
Honigmann Hong is an associate research fellow at the Division of International Affairs, Taiwan Institute of Economic Research.
Translated by Francis Huang
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