FISCAL RESPONSIBILITY AND GOVERNMENT’S FAILURE – BY Dr. BOBBY SRINIVASAN AND Dr. SUDHAKAR BALACHANDRAN

October 30, 2014 | Posted by bobbysrinivasan << back to blog

The real global economic scene is somewhat mysterious and confounding. The western world, namely the US and Europe, are warped by extravagant sums of debt which in turn are not allowing them to function efficiently.
ECB President Mario Draghi lowered the interest rates in the Eurozone to a barely visible 0.05%. This is essentially 0%, the lowest rate in the Europe’s history. “Can the interest go below this?” is an interesting question. The recent cut in the interest rate itself is miniscule but done only to make a political point (the interest rate cut was from 0.15 to 0.05). His point actually is that the interest rates are no longer useful to the recovery. Already the interest rate has been very low for a long time and it is doing hardly anything to revive the economy.
Observation 1: During the last 5 years, the interest rate in the Eurozone has been hovering around 0% and this has not helped the Eurozone economies to pull out of this prolonged recession.
Observation 2: The debt levels of many Eurozone countries as a proportion of GDP has crossed well over 100% and this has actually wiped out any possibility of economic recovery.
The US economy’s debt level as a proportion of GDP has surpassed the 100%. The US government seems to be insensitive to this issue. So far, they have been callous about it and have dealt with the problem either by raising taxes or by manipulating the currency to create inflation, which reduces the future cost of today’s debt while destroying the purchasing power.
The effort to reduce the debt is required urgently. The following options are available to achieve this:
1. Grow the economy: The western world should consider this possibility but it is impossible to grow fast enough to eat into the debt principal.

2. Increase taxes: It is counter-productive because the level of taxation needed would cause a rapid reduction in economic activity, prompting yet move government spending which simply brings back to square one namely, too much debt.

3. Cut spending sharply: It is difficult to survive politically and no politician who wants to win an election would venture to do that.

4. Wealth confiscation: Take a proportion of a citizen’s wealth as a one-time additional tax. Add up all assets, subtract liabilities and take, say, 100% of the net asset. This, of course, is a scary possibility but is not beyond any government’s jurisdiction.

In India, our government debt level is slowly but certainly climbing up. Our growth rates have tapered off to lower levels and therefore, the debt level will certainly reach 100% of GDP in due course of time. IMF has suggested a solution namely the government takes a portion of individual’s wealth and use it to reduce the debt. We should hope that our economy recovers from the below 5% growth syndrome. If this does not happen soon, we should be prepared for wealth appropriation and certainly that will not be a pleasant experience.

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