The government continues to manage its finances with increasing reliance on debt to cover expenses.
The government continues to manage its finances with increasing reliance on debt to cover expenses. Our reliance on debt to fund our fiscal operations has never been greater, and the situation is only going to get worse.
Economic growth, driven primarily by import-supported consumption, remains constrained as the country scrambles to maintain and adjust foreign exchange liquidity. Without imports to drive consumption, economic growth is expected to remain slow, and as economic growth remains low, tax collections associated with growth are also expected to remain low, adjusted for inflation. In such a scenario, budget deficits could continue to rise, unintentionally being financed by further debt accumulation.
Broad money is effectively the money that exists within the system, consisting primarily of currency in circulation and various deposits that exist at central banks and commercial banks. Governments continue to rely heavily on borrowing to fund their fiscal operations, which inadvertently leads to an increase in broad money as more money is created by central banks to meet the government’s insatiable demands. linked.
An examination of broad money (M2) figures shows that government borrowing related to budget support has reached a record high of 78% of broad money. These borrowings against broad money have been creeping up over the past 12 months, and could rise further given the development of the situation.
Budget support-related borrowing has remained at 65% of broad money for the past five years. It is only in the last 12 months that its share of broad money has started to increase. This shows that the government is increasing its reliance on domestic debt and printing money to fund its fiscal operations. The previous practice of borrowing directly from the central bank has been abolished, but is eventually replaced by open market operations in which governments borrow funds from banks at relatively high interest rates.
But what happens when money continues to be created by central banks? It’s because more money is in the system, circulating through the economy, and the same money is being used to pay for imported goods and services. It means chasing a finite number of goods and services, and even foreign currency. The more money we have chasing fewer goods and services, the more demand there is for the same. If demand increases and supply remains relatively unchanged, the price level will rise, leading to further inflation. This is precisely why inflation continues to rise unabated, while the rest of the world and other parts of the world continue to slow. If there was more money in the economy, and that money continued to fund ever-increasing government deficits, more problems would arise.
In order to actually achieve the elusive inflation target intended to curb inflation, the budget deficit must first be reduced, which means either raising revenue or streamlining spending. Raising revenue by taxing a narrow tax base will only make matters worse, further eroding household incomes and undermining the operation of the formal economy.
It remains important to extend the tax net to sectors of the economy that remain largely tax-free, and have been for over 50 years at this point. Any further delay in this regard would make the situation even worse, leading to further damage to real household incomes. Given the consistently disastrous fiscal and monetary policy regimes, per capita income in US dollar terms has largely stagnated over the past five years, while economies in the region and at similar stages of development have continued to grow. That’s not surprising.
Failure to contain fiscal deficits through privatization, reform of state-owned enterprises (SOEs), or spending cuts will ultimately lead to a scenario in which governments continue to rely even more on debt to finance their deficits. The country has reached a situation where the cost of raising debt accounts for more than 70% of the tax revenue generated by the government. If things are not sorted out, this amount is likely to continue to rise as mark-up costs become a larger proportion of tax revenue, leaving little for development and social spending without resorting to further borrowing.
One thing to note here is that as governments continue to lock out private sector borrowing and take on more and more debt, the private sector may not have access to achieve growth by investing in the economy. This means that it will be difficult to do so. Credit implications given the government’s over-reliance on debt. Crowding out of the private sector ultimately means less economic growth from investment and less job creation. Moreover, inflation as a result of budget deficits will continue to erode household incomes and real savings.
Government budget support for broad money at record levels is a serious concern, and if unchecked over the coming quarters, inflation will continue to rise and erode people’s real disposable income. Country. We can either improve our policies to ensure sustainable growth and increase household incomes, or we can continue to run persistent deficits and undermine the prosperity of millions of households across the country through inflation. In this case, more money ultimately creates more problems.
Disclaimer: The views expressed in this article are the writer’s own and do not necessarily reflect Geo.tv’s editorial policy.
The author is an independent macroeconomist.