Our DEBT is UNSUSTAINABLE
Do you think the US can curb its spending and DEBT?
If US truly wanted to contain it, what about implementing a Swiss-style debt brake?
It would involve an amendment to US constitution.
Will they do it?
Doubtful but there is hope!
What is a debt brake?
The debt brake is a simple mechanism for managing federal expenditure.
It is designed to prevent chronic deficits and thereby an increase in debt.
How does a debt brake work?
Debt brakes limit expenditures to the level of structural i.e. cyclically adjusted, receipts. Expenditure may be increased ONLY if its financing is secured by receipts or corresponding sacrifices.
What about tax reductions?
They must be accompanied by corresponding expenditure cuts.
Goals of Debt Brake:
(two classical objectives of fiscal policy)
1. Ensuring sustainable public finances
2. Balancing out economic cycle and growth fluctuations
Why a debt brake?
The debt brake is designed to avert (chronic) structural imbalances in federal government finances and thereby prevent federal debt from soaring.
How does debt brake work in different economic cycles?
During downturn phases of the economic cycle, a debt brake ensures a countercyclical fiscal policy by permitting limited cyclical deficits and when economy is booming it requires surpluses.
With the debt brake, nominal debt is to be stabilized over the longer term.
If successful, debt in relation to aggregate value added (debt ratio) declines when economy grows.
If within the framework of budget & financial plan, we could strive for a more ambitious target.
How does the debt brake work?
It consists of a simple expenditure rule: the annual ceiling for ordinary expenditure is linked to the amount of ordinary receipts.
How do we ensure that cyclical fluctuations in receipts are not transferred to the expenditure ceiling?
Receipts are adjusted by the cyclical factor. It can be understood as a function of the output gap & is defined as the ratio of trend GDP to current GDP. (Trend GDP is est)
When economy is booming, the cyclical factor causes the expenditure ceiling to be lower than receipts and generates a financing surplus.
In times of recession, the formula tolerates a deficit. The expenditure rule acts independently of the amount of the tax burden.
How does the expenditure rule act independent of the tax burden?
It permits tax hikes as well as tax cuts. However, a tax reduction has to be accompanied by expenditure cuts.
Bottom line: If growth in fiscal expenditures is capped at growth rate of GDP & budget over short term is required to be balanced, then we could solve our debt crisis.
So there is hope if we use other financial systems as frameworks or models.
Right? But will they do it? 🤔
Thank you to FFA – Federal Finance Administration SWISS.