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June 26 2022 9:27 PM ˚
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Is government debt bad?

Yusuf Mansur
Yusuf Mansur is CEO of the Envision Consulting Group and former minister of state for economic affairs. (File photo: Jordan News)
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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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