Fiscal irresponsibility and debt default

Sunday, 17 July 2011 04:51

Written by Nonoy Oplas

The term “debt default” suddenly has become a common term in public discourse in the US. The biggest economy in the world, the strongest military power in the world, and among the beacons of the “rule of law” in the world, is entertaining the idea of violating the rule of law, by defaulting on its huge public debt payment. What happened?

It is actually common sense and will not take a degree in astrophysics or financial economics to understand that living beyond one’s means will bring someone to big trouble someday. By spending larger than one’s income or revenue, regularly and consistently, then one’s debt will simply pile up year after year. And that is what has happened to the US and so many other countries in the world now, rich and poor  alike.

I will limit my words and show these charts and a table below to speak for themselves. These will help readers make their own conclusions too.

source: The Economist, Buy now, pay later, April 13th 2011 issue.

The US’ budget deficit (expenditures larger than revenues) from 2010 to 2012 is projected to average around 9 percent of GDP. This is a very high figure. The ballpark “sustainable” level is 3 percent of GDP or lower. I discussed this chart earlier in ATR and the soul of limited government.

Fiscal irresponsibility, of public spending larger than taxes and other revenues, has been around since the 70s or earlier. There was a short period of fiscal surplus in the last decade (mainly during Pres. Bill Clinton’s term) but were erased immediately. Source of this chart and below is The Economist, I just forgot to note the issue date.

While the US war in Afghanistan, Iraq and elsewhere, then the huge corporate bail-outs in 2009-2010 have contributed a large part for the big jump in public spending in recent years, it will be the expensive welfare and entitlement programs plus high interest payment that will tear down the American taxpayers’ and government’s pockets in the coming years and decades.

Recently, it was Ireland and Greece that experienced deep fiscal crisis. Soon, Portugal, Spain, Italy, UK and other European countries, and the US, will follow suit. Note the 14 countries above which have gross debt of 77 percent of GDP or higher in 2010.

The US, or any other highly indebted economies around the world, should NOT default on their debt payment. The current high debt payment is penalty for past wastes and excesses. It should be a painful reminder that fiscal irresponsibility is wrong.

What the US and other highly indebted countries should DO, is to cut spending, from the size of their bureaucracy to military spending to expensive entitlements to foreign aid. If revenues are not sufficient to cover whatever bleeding heart programs, then that’s it. Governments should learn to live within their means.

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