Saturday 19 January 2019

Richard Curran: Debt making a comeback - and storing up strife from Washington to Rome and beyond

The flagrant borrowing of US President Donald Trump could booby-trap the economy for a major crash after he leaves the White House. (Stock image)
The flagrant borrowing of US President Donald Trump could booby-trap the economy for a major crash after he leaves the White House. (Stock image)
Richard Curran

Richard Curran

The eyes of the world continue to fixate on United States President Donald Trump's tweets about his on/off summit with North Korea's Kim Jong Un.

Mr Trump, for all of his bluster, chaos and hyperbole, is actually playing a careful sleight of hand.

Like a seasoned hustler of the three-card trick, one hand is waving around about North Korea and missiles, while the other gets down to the real business of his presidency. And it is happening with the support of Congress in Washington.

When Mr Trump entered the White House in January 2017, America's national debt stood at $19.9 trillion (€17tn). Today it is over $21tn (€17.9tn). His administration borrowed an extra one thousand billion dollars in national debt in his first 14 months in office.

And, more significantly, he is running up the country's exchequer deficit. He is heading for a return of $1 trillion-plus annual deficits, while the national debt, if not re-directed, will approach $29tn (€24.7tn) by the end of the next decade.

The independent Congressional Budget Office said recently the amount Congress spends in excess of what it takes in from tax revenues - for 2018 will be $804bn (€686bn) - will exceed the $1tn (€0.85tn) threshold starting in 2020.

The latest deficit figures do not include the impact of the $1.5tn (€1.28tn) tax cuts programme the president is overseeing or the fact that Congress has given him freedom to borrow unlimited amounts of money until March 2019.

This all needs to be put in context. The US did run up $1tn annual deficits during the Obama years after he tried to cope with the fallout of the financial crisis. The deficit had come down substantially towards the end of Obama's second term in office. Under this new administration it has been rocketing.

When Barack Obama became president for the first time in January 2009, America's national debt stood at $10tn (€8.5tn). When he left office it had ballooned to $19.9tn (€17tn) and it is now more than $21tn (€17.9tn).

With corporate tax cuts coming, the State is taking on higher debts to the benefit of business. Much of that money will benefit a relatively small group. Bank lending restrictions introduced after the crash are being relaxed.

With a rising stock market and tax cuts on the one hand, and bigger deficits and national debt on the other, it begs the question of whether Mr Trump's policies are booby-trapping the economy for a major crash after he leaves the White House.

Somebody else will inherit these figures.

Mr Trump may believe he can pardon himself of any wrongdoing as president, but will the public pardon him if the economy blows up?

As long as the US can continue to borrow, short-term thinking makes it very attractive for politicians to keep it going. This very common political tendency is hardly unique to the United States.

We are no strangers to it in Ireland. And it is also playing out in Italy where €2.3tn debt, one of the highest in the world per GDP, has become a source of concern. Political uncertainty is seen as the catalyst for genuine worry about what lies ahead for the eurozone's third-biggest economy. Italy's far-right National League Party, one of those forming the new populist government, wants to see a flat 15pc income tax rate on those earning up to €80,000 per year, and 20pc on those earning more.

This would deplete exchequer revenues substantially. It also wants to row back on pension reforms already in place and introduce a universal basic income that would raise public expenditure further.

Together with winding back pension reforms, these measures could cost 6pc of GDP annually. But how can Italy afford this, especially given its national debt which amounts to 132pc of GDP?

Inevitably, politicians making these kinds of promises are the ones being listened to by a growing percentage of the Italian electorate.

In the short term, Italy is not yet in a crisis.

Last year, it ran up a budget surplus of 1.7pc of GDP before interest payments on its debt. But while for many Italians this all feels like the bad times, recent years may well have been the good times.

The economy should have enjoyed a relatively benign economic environment of low interest rates, cheap oil and rising stock markets.

This was a period when they could have or should have made more reforms. Instead, economic growth has been low and national debt remains stubbornly high. Living standards are stagnating and one in three Italians in the 25-54 age group is not in work.

It cannot use fiscal stimulus because its national debt is so high. All of this places the country at a crossroads. It isn't so much about being forced into decisions today, but taking the wrong road now may land it in serious trouble in a few years' time.

Can we in Ireland look on with some degree of smugness about the benefits of the tough decisions we made during our crash and how they have helped a turnaround? Can we take some comfort from the wisdom and courage of political leadership in making us take our hard medicine?

The answer is we cannot. The US and Italy are massive problems in the making but they can continue to borrow. When our crash came, it hit so hard that we could no longer borrow.

Therefore we didn't take the brave decisions, we took the only decisions realistically available to us. We were held down by the troika to make sure we took our hard medicine.

Undoubtedly, Irish people could have made a stronger political or mass movement resistance to those painful decisions and it helped perhaps at times that we didn't.

The country is still coping with some of the consequences of difficult spending cuts while also having missed an opportunity for real and deeper reform.

So, is the political culture around the economy and borrowing in Ireland all that different to the US or Italy? I am not sure it is.

And anyway, are we truly out of the woods now? The Irish economic recovery was led by foreign direct investment. The exchequer recovery required discipline but also the fact that our national debt was relatively low going into the crisis. We borrowed our way through a crisis.

A national debt of €40bn in 2007 ended up being €200bn in 2015. How could we come through another exchequer crisis in the future if we entered it with €200bn in debt instead of €40bn?

In April 2007, then Taoiseach Bertie Ahern pledged to virtually eliminate the national debt within five years.

Needless to say, it didn't pan out that way.

In 2016, Mr Trump said he would eliminate the US national debt within eight years. Shortly after arriving in the White House he was bragging about US debt, which dipped after his inauguration. He took to Twitter to demand credit for it.

"The media has not reported that the National Debt in my first month went down by $12 billion vs a $200 billion increase in Obama first mo.," he wrote.

He isn't talking about it anymore. Republican politicians who excoriated Mr Obama for borrowing so much in a crisis, have given Mr Trump carte blanche to borrow what he wants in a time of plenty.

As the US President prepares to meet "little rocket man" and distract so many with theatrical gestures and rhetoric, it is worth following the money when it comes to Mr Trump's stewardship of the world's biggest economy.

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