Un déficit público continuo, ¿aumenta la deuda?

En el blog de Bill Mitchell, en sus ejercicios del sábado para los lectores, plantea la siguiente pregunta:

Question 3:

A country can only start to reduce its public debt relative to GDP when the government can run primary fiscal surpluses (that is, government spending net of interest payments on debt is less than taxation).

The answer is False.

Razón: depende de lo que haga el Banco Central. Una deuda respaldada por un Banco Central capacitado para comprar ilimitadamente bonos públicos, no tiene por qué aumentar la deuda/PIB. Explicación:

The mainstream framework for analysing the dynamics in public debt ratios starts with the concept of thegovernment budget constraint (GBC). The GBC says that the fiscal deficit in year t is equal to the change in government debt over year t plus the change in high powered money over year t. So in mathematical terms it is written as:

which you can read in English as saying that Budget deficit = Government spending + Government interest payments – Tax receipts must equal (be "financed" by) a change in Bonds (B) and/or a change in high powered money (H). The triangle sign (delta) is just shorthand for the change in a variable.

However, this is merely an accounting statement. In a stock-flow consistent macroeconomics, this statement will always hold. That is, it has to be true if all the transactions between the government and non-government sector have been correctly added and subtracted.

For a sovereign government that issues its own currency, the previous equation is just an ex post accounting identity that has to be true by definition and has no real economic importance.

A primary fiscal balance is the difference between government spending (excluding interest rate servicing) and taxation revenue.

The standard mainstream framework is usually expressed in terms of the ratio of debt to GDP rather than the level of debt per se. Even so-called progressives (deficit-doves) use this framework as if it applies to all governments.

The following equation captures the approach:

So the change in the debt ratio is the sum of two terms on the right-hand side: (a) the difference between the real interest rate (r) and the GDP growth rate (g) times the initial debt ratio; and (b) the ratio of the primary deficit (G-T) to GDP.

The real interest rate is the difference between the nominal interest rate and the inflation rate.

This standard mainstream framework is used to highlight the dangers of running deficits. But even progressives (not me) use it in a perverse way to justify deficits in a downturn balanced by surpluses in the upturn.

Many mainstream economists and a fair number of so-called progressive economists say that governments should as some point in the business cycle run primary surpluses (taxation revenue in excess of non-interest government spending) to start reducing the debt ratio back to "safe" territory.

Almost all the media commentators that you read on this topic take it for granted that the only way to reduce the public debt ratio is to run primary surpluses. That is what the whole "credible exit strategy" rhetoric is about and what is driving the austerity push around the world at present.

So the question is whether continuous national governments deficits imply continuously rising public debt levels as a percentage of GDP and whether primary fiscal surpluses are required to reduce the public debt ratio.

While MMT advocates running fiscal deficits when they are necessary to fill a spending gap left by non-government saving, it also emphasises that a government running a deficit can also reduce the debt ratio if it stimulates growth.

The standard formula above can easily demonstrate that a nation running a primary deficit can reduce its public debt ratio over time.

Furthermore, depending on contributions from the external sector, a nation running a deficit will more likely create the conditions for a reduction in the public debt ratio than a nation that introduces an austerity plan aimed at running primary surpluses.

Here is why that is the case. A growing economy can absorb more debt and keep the debt ratio constant or falling. From the formula above, if the primary fiscal balance is zero, public debt increases at a rate r but the public debt ratio increases at r – g.

The orthodox economists use this analysis to argue that permanent deficits are bad because the financial markets will "penalise" a government living on debt. If the public debt ratio is "too high" (whatever that is or means), markets "lose faith" in the government.

Consider the following Table which shows two years in the life of an economy.

It keeps things simple by assuming a public debt ratio at the start of the period of 100 per cent (so B/Y(-1) = 1).

Assume that the real rate of interest is 0 (so the nominal interest rate equals the inflation rate) – not to dissimilar to the situation at present in many countries.

Assume that the rate of real GDP growth is minus 2 per cent (that is, the nation is in recession) and the automatic stabilisers push the primary fiscal balance into deficit equal to 1 per cent of GDP. As a consequence, the public debt ratio will rise by 3 per cent. So in Year 2, the debt ratio is 1.03 of GDP.

The government reacts to the recession in the correct manner and increases its discretionary net spending to take the deficit in Year 2 to 2 per cent of GDP (noting a positive number in this instance is a deficit).

The central bank maintains its zero interest rate policy and the inflation rate also remains at zero so the real interest rate doesn’t move.

The increasing deficit stimulates economic growth in Year 2 such that real GDP grows by 3 per cent. In this case the public debt ratio falls by 1 per cent.

So even with an increasing (or unchanged) deficit, real GDP growth can reduce the public debt ratio, which is what has happened many times in past history following economic slowdowns.

The best way to reduce the public debt ratio is to stop issuing debt. A sovereign government doesn’t have to issue debt if the central bank is happy to keep its target interest rate at zero or pay interest on excess reserves.

The discussion also demonstrates why tightening monetary policy makes it harder for the government to reduce the public debt ratio – which, of-course, is one of the more subtle mainstream ways to force the government to run surpluses... como veíamos en el post anterior, sobre la improbabilidad extrema de que los países del sur de Euro lleguen a estabilizar su deuda, y por tanto, a pagarla.