Tue, Jul 29, 2014 - Page 8 News List

Neither a borrower nor a lender be

By Wu Hui-lin 吳惠林

Earlier this month, New Taipei City Mayor Eric Chu (朱立倫) announced that the city government plans to issue NT$10 billion (US$332.9 million) in “city treasury bills” next month to relieve a budget shortage.

The National Treasury Administration said that issuing city treasury bills provides a new channel when a local government faces a shortage in funds, and because the interest rate is relatively low, the central government is pleased to see the issuing of the bills.

However, as China’s local-government debt crisis is worsening and the eurozone debt crisis remains unresolved, the move offers an excellent opportunity to revisit the fundamental question of whether borrowing money, issuing debt and public debt destroys the country involved.

The public pays taxes for the government to provide services, and the government can only do so within the budgetary limits set by the taxes levied each fiscal year.

In other words, its expenditure should not exceed its revenue. The services the government provides should be proposed by the public or by popularly elected public representatives who are there to monitor the government on the public’s behalf. After collecting relevant information through the relevant channels, the government then comes up with its annual budget, which, in theory, should be within its budgetary limits.

However, according to the economic theory of “functional finance,” the idea that expenditure should not exceed revenue was challenged by the proposition that it did not matter if expenditure exceeded revenue.

Since there is limited scope to increase taxes, governments then borrow so that they can increase expenditure. During election campaigns, candidates often promise to boost spending on infrastructure, and during the global economic panic of the 1930s, economist John Maynard Keynes’ theory of government-created “aggregate demand” was widely accepted as governments adopted costly policies to stimulate demand.

With the wide acceptance of deficit spending, it has been difficult to strike a balance between revenue and expenditure, as governments often spend more than they have in reserve and have no choice but to borrow money.

Almost every country in the world is doing this, and it is this practice that has caused the debt crises of the modern era. The debt crises around the world demonstrate that this is a serious problem.

How can this problem be resolved? There are two possible solutions: austerity or growth.

The former means reducing government expenditure while the latter entails borrowing to increase expenditure and stimulate the economy. The jury is out on which approach works best, but both Iceland and Greece have been forced to resort to austerity measures, and their economies are gradually recovering.

The word “debt” means “owing money,” which implies both a debt and the responsibility to return that debt. When deciding to borrow money, a clear and thorough plan is required, outlining how much is to be borrowed, under what conditions, when it is to be repayed and how the money required to repay it is to be raised.

Borrowing money was a big deal in pre-industrial agricultural societies. Debtors would be embarrassed and constantly thought of how to repay debt. If they were unable to do so, they would apologize and it even happened that they would repay it with their lives.

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