Robert Buddan, Contributor
THE JAMAICA Labour Party's Budget contribution has been headlined by Edward Seaga's call for debt ceilings and Audley Shaw's strictures on governance. Mr. Seaga renewed his call for fiscal rules that would provide legal restrictions on Government borrowing, spending or debt accumulation. Mr. Shaw concentrated on the credibility of the Budget and on a ten-point prescription for credible governance. The issue of debt ceilings has been of long-standing interest in the United States running aside its own debt problems
and it is useful to review their experience.
Both the United States and countries of the European Union have fiscal rules. Under the Maastricht Treaty, EU countries must have budget deficits of three per cent of GDP at most and national debts of 60 per cent of GDP or less. We might note, however, that these rules do not apply to private companies. The average private debt of EU firms is about 110 per cent of GDP. Business leaders say that governments are irresponsible because they spend more than they earn. Businesses do too but we hardly hear of it. Much of the rise in public debts has sometimes even come from bail-outs of private firms. This has been true for countries as varied as Sweden, Finland, France and Jamaica.
US DEBTS
At the end of April 2003, the U.S. national debt was US$6.5 trillion dollars. Each American owed US$22,200. The U.S. national debt has increased by US$1.13 billion a day since October 2002. In contrast, at the end of March 2003, each Jamaican owed debts of J$231,000 or US$4,125.
The U.S. economy runs a budget deficit and a trade deficit. About 25 cents out of every dollar for non-oil goods is on imports (compared to about 60 cents in Jamaica's case). U.S. imports is about a third greater than exports. Over the past seven years about 40 per cent of the increase in U.S. capital stock has been financed by foreign investments. Like the Jamaican economy, the U.S. economy suffers from a worrying trade deficit, budget deficit and reliance on external investments.
But the U.S. economy has stronger prospects for growth. It is a much larger and stronger economy and foreigners have higher hopes of earning profits on their investments in the U.S. The U.S. can pay its debts even if it has to resort to force to secure profitable assets around the world. It controls the rules of the world trading system and the U.S. dollar is ultimately backed by U.S. military might and global presence. This is the difference between the U.S. and Jamaica. Because of this difference major creditor nations in Asia and Europe shoulder the U.S. debt in the form of Treasury Bonds and various long-term and medium-term instruments. This has given the U.S. the luxury of running up debts. For 30 years the U.S. has been running budget deficits. Then towards the end of the Clinton period it managed a surplus in 2001. But since then, the country has been back in deficit. Bush's plans will mean further deficits in the next five years. Those deficits will come from increased spending on war and tax breaks for the rich.
The U.S. has a US$10 trillion GDP. In a March report to Congress, Senator Hollings reported that the U.S. budget deficit is a huge 5.2 per cent of GDP and the national debt is 64.8 per cent of GDP. This is greater than the average in the European Union. Even so, U.S. administration officials are saying the deficit doesn't really matter. They say it is a temporary problem caused by the war on terrorism and a sluggish economy. Future growth will address the problem. Their argument is not to cut back spending.
DEBT CEILINGS
John Snow, the newly confirmed Secretary of the Treasury used to be an advocate of a constitutional amendment that required that the budget be balanced. This is the idea Mr. Seaga is advocating. Now Snow is saying that the way to deal with the budget is not really to cut the deficit as such but to have growth.
The U.S. has had debt ceilings for a long time but they have not worked. In 1940, the ceiling was US$49 billion. With a population then of 132 million this amounted to US$370 per person. With the ceiling now at U$6.4 trillion at current population, the debt per person has grown by over 12,000 per cent.
In 1985, Congress passed the Gramm-Rudman-Hollings Deficit Reduction Act. The Act was refined in 1987. But by 1989, the Reagan administration had left the country with the largest national debt in its history.
This plan was designed to place caps on budget spending. Yet, spending continued to rise faster than inflation and in 2002, Congress allowed the caps to expire in order to pursue deficit spending.
Another plan to restrain budget spending was the pay-as-you-go plan. The idea is simple. Whenever Congress approved additional spending it had to find compensatory sources of revenue. But this too has gone out the window. In 2001, Congress passed Bush's US$1.3 trillion tax cut package without ways of making up for it. Furthermore, there is no plan for compensating for the US$1 trillion in new spending or from tax breaks over the next five years.
The U.S. media rarely reports the size of the U.S. deficit as a share of GDP. While the deficits of the 1960s and 1970s were generally under 2 per cent of GDP, those of the 1980s usually exceeded five per cent. In fact, deficits have increased even during periods of economic growth.
The U.S. hit its new national debt ceiling in February 2003. The ceiling was raised from US$5.95 trillion in June 2002 to US$6.4 trillion. Republicans want to raise the ceiling again arguing that this was necessary to protect the U.S.' credit ratings. They now want the ceiling raised to US$7.4 trillion. This campaign is being led by John Snow himself.
Alan Greenspan, Chairman of the Federal Reserve (Central Bank) even believes Congress should drop the debt ceiling because it has not served its purpose. This is a view shared by the Bush administration. Congress hopes to have a new debt ceiling by the end of May since the alternative would be default.
GOVERNANCE
If we take Mr. Seaga and Mr. Shaw's arguments together, they seem to be saying that good governance is one where Government spends prudently, saves wisely and therefore does not fall into debt. Mr. Seaga's administration of the 1980s might have applied fiscal constraints but it didn't. Critics of America's Governments have accused their administrations of financial irresponsibility in spite of separation of powers, an independent Federal Reserve and fiscal rules for spending constraints.
It is not that there is better fiscal governance among the developed countries. They have debts and deficits too. It is that they are the major investing economies and they invest in each other's economies more than they invest anywhere else. They hold each other's debts, meet regularly in G-7 Summits to set accommodating interest and exchange rates and back each other's currencies.
The experience from these countries shows that it is not enough to place an upper limit on spending. Good governance means placing a minimum limit on the social budget. Without this, cut backs in spending will come at the expense of the social sector. If the JLP wants to resist GCT increases and the manufacturers association wants to resist the cess on imports, the implication is for spending cut-backs on the social sector. In fact, one of the crucial missing pieces of Mr. Shaw's points on good governance is that budgets need to protect the social sector. There was no reference to this sector at all.
