The premier recently told the House of Assembly that the Virgin Islands has a national debt of just over $134 million. That is a lot of “cash.” But what does this debt mean in economic terms to laypersons? How would this debt impact the economy in terms of economic and job growth?
Well, a little bit of reading shows this commentator that national debt results from government annual deficits. This is where government’s total annual expenditures exceed annual revenues. When deficits occur year after year, national debt begins to build.
Government annual surpluses occur when the opposite takes place and annual revenues exceed annual expenditures. Most economists would view national annual surpluses as an ideal. That is how governments build their cash reserves, even lending money to other governments and organisations.
Okay. Government makes up the difference of expenditure over revenue through borrowing. Few countries run solely on what cash government has in the coffers. Indeed, national budgets are simple projections based upon historical data: That is why they are termed budget estimates. In other words, government borrowing is a universal norm.
Unpredictable revenue
Government receipt of revenue to operate is a complex affair, and as in a business revenues are unpredictable. As a consequence, banks provide government with the cash required to function in a symbiotic type partnership.
In other words, banks provide governments with the necessary liquidity to manage the affairs of state: pay salaries and wages; purchase machinery and office equipment; manage public works and power plants; lease buildings; pay rent; pay overheads; pay construction and development costs; pay consultancy and project fees; service travel; and so on.
And do bear in mind that bank fees and interest payments are a further expenditure burden on government. So like the individual consumer who spends on a credit card and pays the loan back with interest, so does a government. This interest can mothball if the principal on the loan is not reduced. Therefore, interest payments on government debt can further increase government expenditure and annual deficits, increasing the national debt burden.
When national debt becomes unsustainable, an economy may default. In this scenario, government is unable to repay its debt: the Greek model.
The result of this is frequently runaway inflation and severe economic and financial contraction, as investors flee and banks collapse. Ultimately, political and social upheaval rears a head.
Gov’t options
Fortunately, unlike the individual consumer, government has many more options to generate revenue or negotiate out of a financial hole.
To decrease the size of deficits, governments can sell bonds; sell public assets; raise taxes; and more. Economically powerful countries such as the United States and China can even print extra currency.
The national debt is therefore an accumulation of annual deficits. So the $134 million debts metric of the VI did not occur in just one year, unless this commentator is missing something.
In order for Joe Taxpayer to understand how the debt figure was arrived at, Joe will need to see a narrative of government expenditure and revenue over a number of years — preferably from the time the national debt first appeared.
The state of national debt in a country is expressed as a percentage of gross domestic product. So the VI national debt ratio, assuming a GDP of $1 billion, gives a national debt metric of 13.4 percent.
A low debt-to-GDP ratio is considered a good thing economically. It means that government can function effectively within its budget and pay debt repayments as they become due. It also means that governments have the ability to borrow further and pursue long-term development plans that could further impact positively economic growth and development.
This is much like the consumer with low debt, where Joe Consumer is viewed by the bank as a good bet to offer that car loan.
Too high?
Okay, a question is asked: Is the 13.4 percent figure for the VI too high? Is this national debt a worrisome burden? Using large industrialised states as benchmark, it does not appear so. In 2013, the US debt-to-GDP was 104 percent; the United Kingdom’s 92 percent; and France’s 128 percent. In the Pacific, Japan’s ratio was 243 percent, while China’s was much lower at 22 percent, with India’s at 66 percent.
Of course, each country exists within a specific geopolitical, demographic, and economic context. One country’s debt-to-GDP metric may affect it differently from another with a similar metric.
The wise VI resident would do well to ignore international benchmarks and look at the national debt figure in the light of recent VI financial history. How does the national debt figure in March 2015 compare with what it was in 2000, 2005, and 2010? That comparison should give a better picture of government stewardship of the economy.
Accuracy of assessment entails the use of comparable numbers across the board. This will entail more in-depth analysis of debt to GDP in the territory, to arrive at a relevant and plausible assessment of how national debt affects the VI economy and society.
Bear in mind that debt as a share of GDP can decline even when government runs a deficit. This is the norm in a growing economy. However, spending during a recession increases debt permanently.
Fluctuations
In a healthy economy that is growing steadily, national debt rises more slowly than GDP. In fact, governments can pursue budget surpluses in times of strong economic growth, and even pay off national debt completely, holding surplus cash reserves.
On the other hand, when growth slows, or recession appears, national debt can rise as government revenues decrease. In a recession, history shows that government deficits generally increase. This is the result of falling tax revenues from a slow economy. However, despite a recession, governments still have to maintain a certain level of spending on critical items such as national security, infrastructure maintenance, health and sanitation, education, and social welfare.
Austerity was once believed to be able to correct annual deficits and high national debt. However, the story from Europe has shown that this is not the case. In today’s global economy, austerity can create deflationary pressures that stanch economic growth. This in turn reduces government revenue. However, governments may still have to borrow in the midst of a recession to function effectively.
One scenario when that happens is this: Governments increase spending in order to stimulate economic growth. In the short run, this spending further increases annual deficits and national debt.
However, the hope is that stimulus will return an economy to growth. Then when the economy begins to grow, government revenues increase. This in turn allows governments to lower annual deficits and national debt.
Economics is not an exact science. Historically, a country’s economy proceeds in cycles. It goes from growth to strong growth; then slowing growth; then recession; and back again to growth once more.
Another factor in the boom-bust cycle prototype is that post 2009, inflation appears to be receding as a universal economic threat. Anaemic economic growth coupled with deflationary pressures is becoming of more concern to economists and policymakers than inflation.
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