Government debt in Jordan has surpassed the GDP, the income of the
nation, to reach 114 percent, and that has become a source of worry for many. It has caused a slew of negative rumors and nasty scenarios, especially by non-specialist
“pundits”.
اضافة اعلان
Many of those
concerned view the debt as if it were that of an individual, which is not the
case. They also think of debt as a negative phenomenon, which is also not always
true.
Currently, there
is much misunderstanding surrounding the government debt. Government debt rises
when the government runs a deficit and falls when its budget turns a surplus.
More often than not, the government ran a deficit, and so the debt grew.
Some analysts view
government borrowing as equivalent to raising taxes, under certain assumptions,
and if looked at it from an intergenerational perspective. Such a view, known
as the Ricardian Equivalence Theorem, was ably expounded by the neoclassical
economist and Nobel Laureate Robert Barro. The theorem holds that a today
deficit that is financed by debt will have to be repaid with interest by future
taxes, hence the thesis that tax and debt are equivalent.
In spite of the
immediate appeal and apparent simplicity of the theorem, it is not entirely
true and may be misleading, as it views government debt as if it were the debt
of a private citizen.
Government debt is
different from that of an individual. In Jordan, 60 percent of the government
debt is held by domestic banks and the Social Security Invest Fund (SSIF). Depositors
at banks do not view the debt as a burden, as it provides them with an
extremely safe source of revenue. Furthermore, SSIF sees holding government
bonds a highly safe and lucrative source of revenue — even higher than some of
its other investments.
Also, government
debt, unlike private debt, does not have to be repaid, as the old debt is
rolled over (replaced by new debt), a decade-long practice in Jordan.
Typically, the government replaces the old debt with a new (sometimes cheaper)
debt, with possibly longer repayment periods.
… borrowing should be aimed at financing projects, R&D, and the human capital of a nation, and other productivity-enhancing measures, not the bad habits of government, such as overstaffing.
It is important,
however, to note that the size of debt does not grow at a quicker rate than
that of the growth of the GDP. Hence, it is vital for the health of an economy
that the debt be focused on creating economic growth.
In other words,
one should not believe that the government debt is not a source of worry.
Rising interest payments on the growing debt limits the government ability to
dedicate resources to growing the economy, as more and more government
resources go to repaying the debt. In addition, if a portion of the debt is
foreign, the interest payments will go to foreigners and not be spent on the
development of the domestic economy. Consequently, borrowing should be aimed at
financing projects, R&D, and the human capital of a nation, and other
productivity-enhancing measures, not the bad habits of government, such as
overstaffing.
If the
government’s future revenues do not grow, it will have to raise taxes, a
recourse that will dampen growth and increase inequality, as the wealthy
collect revenues on the government debt and the poor suffer in a jobless,
stagnant economy.
One needs to view
debt with all its pluses and minuses. It is also important that the government
in Jordan abide by the golden rule, which states that the government should
only borrow to finance projects that enhance the productivity of the
nation. It takes time to reach there,
but Jordan must, and should, start doing so.
The writer is CEO of the Envision Consulting Group and
former minister of state for economic affairs.
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Jordan News
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