One issue that is always said to trouble central bankers and financial markets is the public sector deficit and the level of public debt of a country.
Governments are very conscious of this and one example of it is the Stability and Growth Pact of the European Union. This is essentially a set of rules designed to ensure that countries in the EU have sound public finances and coordinate their fiscal policies. Member states are expected to correct any excessive deficits within an agreed time frame.
The thinking is that if a country seeks to balance its budget, then the economy would benefit from more investment and more stability. As such, a fundamental element in any economy, like employment, is made subject to fiscal stability. This has been the predominant opinion within the EU, even if it started to be challenged at the time of the last economic recession.
The fiscal discipline that is asked for by the Stability and Growth Pact requires each EU member state to implement a fiscal policy aiming for the country to have a deficit of not more than three per cent of the gross domestic product and to have a debt of not more than 60 per cent of the GDP. In case of having a debt level above 60 per cent, the country should each year seek to reduce it gradually but steadily below that level.
Other countries such as the US and Japan do not have to abide to such rules, but the size of public debt is of concern to them as well.
In Malta, we have not been exempt from discussion about the fiscal deficit and public debt, and maybe differently from other countries, it was the left-wing Labour Party that has tended to promote a policy of shrinking public debt. This is normally the policy of the right-wing parties.
Today, no one questions how we are going to pay the fiscal debt that each country is running up
The main argument against public debt is that at some stage the government would have to repay its debts and this puts a burden on future generations as they would pay the price for our current spending. Thus governments have been and are constrained from implementing certain policies because of a high level of public debt. It is an argument that I tend to subscribe to.
However, is the argument still valid today at the time of the coronavirus? One cannot legislate for all eventualities and, in fact, any rules on fiscal policy could never have anticipated the devastating effect which coronavirus would have on the global economy.
The European Commission took the bold step last month to activate an escape clause of the Stability and Growth Pact to enable member states to respond quickly and forcefully to the coronavirus pandemic. Member states were allowed to undertake measures to deal adequately with the crisis, while departing from the budgetary requirements that I mentioned previously.
The US announced a package worth $2 trillion to support the economy and employment. Governments all over the world are doing “whatever it takes” to tackle the situation to try and stop the freefall in economic activity. Up to five weeks ago, this was unthinkable. Those promoting a balanced budget would have asked how one planned to pay for it and complained about burdening our grandchildren with debt.
Maybe this is another example of how the normal after coronavirus will not be the same normal as that before the coronavirus. Today, no one questions how we are going to pay for the fiscal deficit that each country is running up. What counts is that people do not lose jobs, businesses do not shut down, food is provided and health services are available to those who need it. Public debt is not seen as a constraint.
If we accept this line of reasoning, we could then be challenging the economic rules that we have been applying for the last couple of decades. And once the crisis passes, we can apply the same line of reasoning to make sure we do not go back to a situation where segments of society are left behind.
What will eventually happen no one knows. What we do know is that today governments are saying that public debt should not impede us from fighting the pandemic and from protecting families and businesses. We still have to see whether it will be a constraint in the future like it has been in the past.