Clearly distinguish the public deficit from the debt
The public deficit results from an imbalance in the day-to-day management of the State budget. The latter spends beyond the resources at its disposal. However, these resources are essentially made up of taxes levied on household and business income. These resources are certainly voted by the national representation and socially accepted, but they depend on a legal constraint and would suppose at least, the exercise of a rigorous management at least equivalent to the power of coercion from which they originate. Also the creation of a permanent public deficit reflecting the excess of expenditure over current revenues constitutes in fact the establishment of a right of withdrawal on the future income of citizens without their consent.
In this sense, beyond the principle of accounting balance, the public deficit poses a democratic problem.
The current presentation of the State budget does not allow for a clear and comprehensive distinction between operating and investment accounts and does not link investment revenues to any prior constitution of savings to cover at least the annual depreciation of borrowed capital.
And it would be necessary for the State to apply to itself these rules of balance and savings, scrupulously observed by local and territorial communities. This does not prevent the latter, despite the increasing financial constraints imposed by the State, from maintaining local public services as best they can and representing more than 70% of public investment.
Apart from the possible lags related to the uncertainty of the annual forecast of revenues and expenditures, the operating budget deficit should only be marginal and cyclical… The issuance of treasury bills serving as a cash instrument.
The legitimate question that the State budget deficit must raise, particularly in France, must not distort the issue of public debt. Under no circumstances can the budget deficit be considered as the cause or explanation of public debt. Public debt is not a constraint resulting from poor budget management but remains primarily an economic tool.
The merits of public debt
Indebtedness consists of mobilizing funds, beyond one’s immediate capacity, to finance useful investments when it comes to states and households or profitable ones when it comes to businesses.
This mobilization of funds, made available, presupposes the existence and agreement of lenders who have savings to invest in the more or less long term and implies in return the repayment of the advanced funds plus interest, according to a negotiated schedule.
The use of debt by States therefore corresponds to that economic moment when the savings of agents in excess of resources are transformed into collectively useful investments.
For example, a hot topic of the day, European states will borrow to invest individually and collectively in strengthening their defense, that is, in the security of their citizens. It should be noted that the same approach could be used to invest in the ecological transition of the European economy. In any case, these investments, made possible by the mobilization of the loan, will contribute to the revival of the economic sectors concerned and to the emergence of new activities. They will create wealth and in return allow new tax revenues.
As we can see, the indebtedness of States and the benefits of the investments they generate can only be assessed over time. The relevance of public borrowing will be seen in return by the progressive increase of a service and wealth, like private investments made by companies that measure the profitable effects in the long term.
The question of assessing public debt
Public debt is commonly evaluated as a percentage of GDP. Note that this compares a stock: the outstanding debt; with a flow: the economic value created during the year. This is statistically questionable. What’s more, the establishment of this relationship constitutes economic nonsense. How can borrowing be useful if it has to be paid off in full in a single year of national wealth creation?
As we have just pointed out, the reason a government takes on debt is to increase its capacity to finance investments whose effects can only be seen over time.
It’s also worth noting that the level of debt measured in this erroneous way has never undermined the economic capacity of states: England, the leading economic power in the 19th century, had a level of outstanding debt equivalent to 170% of its GDP; the United States will be at 120% of GDP in 2024; China, according to its official figures, is close to 126% of GDP, and France 113%…. The enigmatic rule urging European countries to limit their debt to 60% of GDP has no economic justification whatsoever, other than to restrict their investment capacity at a time when raising funds through borrowing is becoming essential.
The economic measure of a country’s debt burden should be calculated over a number of years, on the basis of its capacity to pay off its debts in terms of
The economic measure of a country’s debt burden should be calculated in terms of the number of years it will be able to pay off its debt in relation to the renewal of its GDP. This measure is obtained by dividing two flows, statistically comparable quantities: GDP by the annual amount of capital amortization plus current interest. Thus, if France were to roll over its 2024 GDP, it would take around 5 years to pay down its debt in principal and interest, which is less than the average duration of its indebtedness.
The duration of public debt
It’s not uncommon to deplore the fact that public debt is a burden for future generations. But this is to misunderstand the average duration of public debt, which is 6 to 8 years. This means that one and the same generation will experience around ten renewals of government debt, which leaves plenty of time to reduce the debt burden, if necessary, and to place the burden on the same generation. The debt renewal technique of replacing matured loans with new ones, using financial hedging techniques, or replacing current loans with lower-rate loans, is called “rolling over” the debt, and it seems to us that the term “active management” of the public debt would be more appropriate…. and would reflect the work of the Treasury administration which, in the recent period, has made it possible to reduce the debt ratio to 1.64% the average interest rate applied to the total debt.
The attractiveness of public debt
It is said that too much public debt would dissuade potential investors, who might fear the risk of default. This misunderstands the workings of the international financial system and the role of the primary dealers (SVTs) selected by the government to negotiate and place government bonds on the secondary financial markets. As a reminder, in 2020, the world’s outstanding public debt will amount to €99,000 bn (representing half of total indebtedness, and this public/private parity ratio has remained constant since the 1970s).
The main economic powers – the G20 – account for 90% of this debt. The lenders to governments who invest in public debt, via primary dealers, are essentially financial intermediaries. Among them, banks, insurance companies, savings funds, pension funds and retirement funds are subject to international regulations requiring them to hold a large proportion, if not the bulk, of their assets in government securities, in other words, in investments in government bonds.
The solvency of governments, ensured in particular by the exercise of fiscal leverage, guarantees the preservation of their assets and their ability to respond to the needs of their members and customers over the long term.
Thus, without the permanence and volume of public debt: the banking system, the insurance system and the pension and retirement system risk collapse …. It’s hard to see investors in government bonds running to their own ruin…. Finally, it should be noted that these investors in government securities can benefit from time to time, to the detriment of the taxpayers concerned, from an improved interest rate thanks to a one-off downgrade in the rating assigned by the rating agencies. This windfall distributed by these auxiliaries of the financial markets in no way indication.
J-P.Rosello
