OPINION: On Being In Debt

All economic observers are in agreement that the two main gauges of the sanity, or otherwise, of any country’s public finances are its Annual Deficit and its National Debt, both in relation to its Gross Domestic Product (GDP). It is the latter that interests us today. In the case of Malta, the 2022 National Budget estimate is that our National Debt will, by the end of this coming year grow to 61.8% of our national GDP.

Public debt is a very important element of not only public finances but also macroeconomic policy in general. It is one attribute or tool through which a country’s both short-term and long-term development and growth policies are structured. This inevitably means that all state borrowing should be done in concomitance with a well-planned policy for financing both a country’s day to day expenditures, but also the country’s major capital and development projects, such as will ensure sustainable overall economic growth.

Looking at Malta’s debt situation within such an overall generic context inevitably brings with it the question: is ours too large or too small? And the temptation is immediately that of comparing with the levels in other countries. Immediately some will point out to enormous, well over 100% of annual GDP, debt levels in countries like the US, and, in Europe, Italy, Portugal, Greece and others.  Whilst the Maastricht Agreement, and the Stability and  Growth Pact, require that an EU’s member state’s debt should never exceed 60% of its GDP, is it wise for any country to take only that as its own reasoning basis for the stability or otherwise of its National Debt?

And the answer is a definite ‘No!’.  There are in fact so many elements that always hang and hover around any sort of borrowing by anyone, let alone a country, that perhaps one of the biggest mistakes constantly being made by (not only our!) politicians and analysts is that of thinking and arguing solely with this ratio in mind when looking at debt.

Any high level of debt that is accumulated over the years, and which has at its heart an unchanging core has a negative effect on the rate of investment and economic growth. This is a matter related in fact to solvency, at least in the long term.

Is, for example, the rate of new money coming in to pay off hard-core debt an active one even as new debt is being taken on? Then there is the relationship to a country’s size of population: over how many heads and by how much is it spread. Also, how much of a country’s national debt is owed only to its own citizens (i.e. practically in-house borrowing) and how much is owed to foreigners who, naturally, cannot in bad times be subjected to any arbitrary new conditions regarding either debt interest payments or maturity date redemption payments. 

And also, finally but not exclusively, in what currency is such national debt expressed. Would a European country that would have incurred a big debt in US dollars be subjected to a high US $/Eur € exchange rate loss when being required to repay such debt?  

Within the central banks of different countries, high-level econometric models provide the background and advice necessary to governments who would in fact be involved in such borrowing. Regrettably in Malta, the Central Bank of Malta (CBM) never publishes this type of work, which is undoubtedly ongoing.  Any students or analysts of such studies will immediately note the paucity of any reasoning justifying, or otherwise, the level of any country’s debt level in relation only to that fatidical “60%” yardstick.

Inevitably, the conclusion will be that many of us too are falling into this big mistake. It is a fallacy to speak of the country which we want to leave to our children and grandchildren when the analysis of, inter alia, our national debt is not made in a scientific enough manner, including by all who labour in the media.