US Debt 7: US Budget Deficit and G8 Debt

Now the US government's fiscal irresponsibility is being scrutinized by its big lenders. Especially the Chinese government. There seems to be no limit to the US government's hunger for ever-bigger expenditures and budget deficit, more public debt, administration after administration, from Republicans to Democrats. That's the debtor.

The lender, the world's 2nd biggest economy in terms of GDP PPP valuation, China. Its government is said to be holding about $1-5 trillion of US debt papers. That amount is equivalent to the GDP of Spain or Turkey, I think, and about 4x the GDP of the Philippines.

The ugly -- fiscal irresponsibility of the government of the world's biggest economy. There is a transmission line somewhere from the fiscal to financial and overall economic environment. So a crisis from the fiscal side can easily be transmitted to the financial markets. When the US government begs for more debt in order to pay some or most of its past debt, then trouble will not be far behind. The "savior" of today's US credit crisis will become the villain in the coming years.

But can the private sector -- the private enterprises, the households and average citizens -- bail out the US government? Yes, they can. In the form of higher taxes (to pay some of the maturing debts), higher interest rates (as government borrowings compete with corporate and household borrowings), and higher inflation rate (a result of higher interest rate, US $ depreciation, etc.).

The G8 would not matter much here because almost all of those industrialized countries -- US, Canada, Japan, UK, Germany, France, Italy and Russia -- are huge debtors. The bigger question is the capacity of the world's biggest lender, China (both its private corporations and government), how long it will keep on lending. Or whether it will get tired and stop lending somewhere in the near future, if not dispose and dump even 1/4 of its huge US$ holdings.

There is no long-term benefit to fiscal irresponsibility. Only short-term gains like bailing out the administration who is sitting in the White House at the time of fiscal bleeding.

Below is the relevant news report today.

http://www.nytimes.com/2009/07/29/us/politics/29sanger.html

On Washington
U.S. Budget Is Scrutinized by a Big Creditor

By DAVID E. SANGER
Published: July 28, 2009

No sooner had President Obama greeted nearly 200 of the bankers, bureaucrats and policymakers who could make or break his economic plans on Monday than they started grilling his economic team with the hardest questions about his economic strategy.

How long are these huge deficits sustainable, they wanted to know. How long do you keep stimulating the economy, and when do you break for the exits? If the dollar nosedives compared other major currencies, what’s the administration’s Plan B?

The questions were mostly asked in Chinese — by a delegation from Beijing that, diplomatic niceties aside, has come to check in on the investment of more than $1.5 trillion that China has made in United States government-issued securities....
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I wrote this last June 04, 2009:

Budget Deficit and Irresponsibility

Budget deficit means that revenues are lower than expenditures. When a household regularly spends more than its combined earnings, then it is said to be regularly living beyond its means and is known to be irresponsible and braggart (“mayabang”). The only understandable exception for such label is when that household has one or more family member/s with a complicated disease and health problem that requires expensive health treatment. In such a case, some people who lent that family some money will not expect to be repaid because they know the hardship and emotional troubles that household is regularly experiencing.

At the macro level, when a government is on perennial budget deficit, say running for 10 or 20 years or more, then it can easily be considered as fiscally irresponsible. It perfectly knows that its revenues from taxes, fees, charges, fines, grants and some privatization are not enough and yet it continues creating new agencies, bureaucracies and enterprises, new programs and subsidies, hiring new and additional people, raising the salary of its employees, and more often than not, raising the perks and pork barrel funds of its President, Prime Minister and legislators.

There are two important negative effects of this kind of philosophy and government practice. First, it corrupts and distorts the financial flows in the economy. The government is perennially borrowing to finance yearly budget deficit, that results in ever-larger public debt, that requires ever-larger debt servicing (principal and interest), that adds pressure in future expenditures that will require more borrowings. Second, the citizens are corrupted into dependence or rent-seeking behavior. If they have some problems that could otherwise be addressed through community or corporate and personal responsibility, they run to the State for subsidies, protection from competition, or they simply wish to become new bureaucrats and politicians in the State’s expansive and high pile of existing bureaucracies and agencies.

One policy tool that a government can do to reduce or stop its fiscal irresponsibility is the privatization of some or all of its government-owned and controlled enterprises, banks and utilities. If those enterprises are currently earning, then the government can sell them at a high price to help retire the huge pile of public debt, resulting in lower debt servicing and lower expenditures. If those enterprises are losing, then the government can sell them at a bargain, get some revenues while stopping the annual subsidies for those losing enterprises and reduce the fiscal bleeding caused by those inefficient State corporations.

But this is easily said than done. Those State enterprises, banks and utilities are one of those “bribery departments” that the politicians in power use to reward some of their political supporters and financiers. Or politicians and activists from other political parties, media, NGOs, and academe that will otherwise become critical of the administration, are co-opted and silenced with high positions and very handsome salaries, perks, travels and arbitrary power to dispense political and financial favors. Thus the inefficiencies and rent-seeking of the past political administration are simply replicated, if not exceeded, by a new batch of inefficiencies, wastes and rent-seeking.

The number of fiscally irresponsible governments (FIGs) around the world far outnumbers the responsible ones. Even the rich countries, majority are perennial debtors. All the G7 countries for instance (US, Canada, Japan, UK, Germany, France and Italy) have huge public debts. Their gross debt as percent of their GDP ranges from a low of 44 percent (UK) to a high of 104 percent (Italy) and 195 percent (Japan).

Here at home, the Philippine State is among those fiscally irresponsible governments in the world. Its annual budget deficit ranges from one to three percent of GDP, amounting to several billion pesos every year. When this is accumulated along with past debts and deficit, outstanding public debt should be nearly Php4 trillion pesos or nearly half of GDP. This year and next year, top State bureaucrats at the Finance, Budget and Economic Planning departments are discussing how many hundred billion pesos they will “allow” as budget deficit.

Those FIGs are more often than not perked up and supported by multilateral and foreign aid institutions. These are regional and global banks funded by contributions by governments themselves but run and managed by technocrats. When FIGs from poor countries lack resources mainly due to wastes and corruption, these foreign aid bodies are more than willing to lend more money. The case of many governments in Africa is a classic example.

More than distortion in financial flows in the economy, it is corruption of the citizens’ mind that is a worse crime of fiscal irresponsibility. For instance, people who abuse their body with excessive intake of alcohol and tobacco products, or live in dirty surroundings and do not observe basic personal hygiene, would later run to the State for “quality” health care and subsidized or free medicines.

It is the relegation, if not substitution, of personal responsibility for “government responsibility” that is the main crime of big and fiscally irresponsible governments.
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See also 
US Debt 1: How Bloated is the US Govt? May 08, 2006
US Debt 2: Private Sector Bailout of Government, September 26, 2008
US Debt 3: Crisis of Irresponsibility, October 13, 2008
US Debt 4: Obama and US Entitlement, November 11, 2008
US Debt 5: Obama's Taxes, Bail Outs, $56 Trillion Debt Bomb, November 13, 2008
US Debt 6: Stimulus Trap, $1.75 Trillion Deficit, and Taxation Blackhole, March 08, 2009