Transcript | 4. lecture: Prone to deficits (Ľudovít Ódor) - University for modern Slovakia

Welcome at today’s lecture whereas we will go back to the question why deficit economizing would become a standard. If we look for an efficient remedy, it is necessary to know the source of the “disease”.

You definitely know the funny signs in pubs saying: “Beer is free tomorrow”. Hence at the Ministry of Finance a sign saying: “We will achieve a balanced budget in three or four years” could be hung. At first the date was planned for 2010 now it is maybe 2016. Simply saying, the best time for consolidation comes always tomorrow. However, it seems such day as tomorrow in this regard will never come. Why are we prone to live on deficit?

Economists have identified several possible causes:

1. I would call the first one hazing. Various techniques have been developed that would hide the major part of the deficit from the public. We will get into more details within these during the following lectures. The reality reveals itself later on, which gives the politicians an opportunity to behave irresponsibly, hence mainly before the elections.
2. Second and a very frequent source of deficits is short-sightedness. Politicians are usually “set to last” for four years. Usually they do not tackle consequences of their decisions over the long-term horizon (when e.g. ageing of population starts to show) or they hope that another government will come to rule and solve the issue.
3. The third cause is also called problem of mutual ownership. Taxes are paid by broad and in the eyes of politicians also anonymous groups of citizens and enterprises. To put this in a simplified way it is easier to yield to particular requirements with regard to schools, pensions, roads etc., when the ones, who are directly financially affected by such steps, do not protest and hence just because they have not been born yet. Thus politicians do not have to handle questions that would make them uncomfortable as for example: Where will the money for that come from?

I will briefly note on further possible causes of the disease called chronic deficit making: Some economists also state that a major preference is: to focus on present not the future (representing the attitude: “If we do not know what the future holds, why to deal with such questions”); to lead political battles (representing ideas such as: “Once I promised this to my voters, I owe them at least a partial evidence that I meant it, even though it was not realistic”); or stating e.g. time inconsistency (e.g. „I was sure the necessity of decreasing deficit yesterday, however, I am aware that we need much more money for building those roads today”). 

In conclusion to this I would also like to mention a phenomenon, which I would call Keynesianism with amnesia. Practically, this is represented within the following: If the economy shows worse numbers, politicians start playing aces in form of stimulation packages and deficits. They reason this by the need to increase demand. On the other hand, if economy works fine, everybody stays silent at once and no one would ever recollect the need to create surplus. However, even the Bible talks about seven years of abundance and seven years of famine. To put it differently – in times of well-being one has to save for the worse times.

I would personally make one additional comment, that in case of Central Europe, politicians have for long time not been toughly confronted with reality. What do I mean by this? The majority of post-communist countries have started off with low level of public debt (Slovakia including). Even though their tax systems are often “leaky” with a high level of tax evasions and the pressure put upon expenditures is high (low employment rates, bad infrastructure or e.g. small supply of capital); however, politicians have not been feeling the necessity to tackle this issue seriously yet, whereas deficits could be funded with impunity in relation to low levels of debt. However, times are changing. Debts are not as low as they used to be and financial markets are not as willing to lend money as they used to be before.

Someone should oppose: “Why to care about being prone to deficits if reckless politicians pay their dues during elections and financial markets will put their part into the “punishment” for such acting?” Unfortunately, it is not as simple as that. The last 30 years have shown that neither developed nor developing countries have avoided the way of choosing deficits. Voters often cannot judge whether it is the bad economic conditions or not being able to administer economy well in case of deficits. Irresponsible administering of economy concerning public finance has been often ignored also by financial markets. The reason for this lay on the one hand within the fact that a lot of resources were available and they believed in the continuation of economic growth on the other hand. Another factor played its part within the euro area – no one would believe that countries with problems would ever be let go bankrupt by other European states. The markets have almost implicitly counted on the fact that the German tax payers would save the “guilty” (which in fact, came true).

How can we thus solve the problem of being prone to deficits? We cannot be naïve and think we would be able to completely win over this disease. However, in my opinion, we can do a lot in order to reduce its occurrence and intensity. We will have to fight within three battlefronts.

1. First of all, all information on lavishness and irresponsibility has to be presented to the voters.  Restricting space to “creative” accountancy, release of all relevant information to the public and by an independent viewpoint upon budgetary policy it is possible to decrease motivation of politicians to transpose disproportionate burdens upon next generations. We would need lobbyists for our children and grandchildren. Transparency is often the most efficient remedy against wastefulness and ineffectiveness.
2. Secondly, we need “control” also from the part of financial markets. Luckily enough, investors who invested in state bonds have realized during the crisis that they have not put pressure high enough for effective administration of public finance. The problem is, however, that they will not even pay for that, because the euro area is trying to save each problematic country without any consequences for the creditors. Profits are private, losses are public.  Participation of private sector on tackling the problems within the new European Stability Mechanism (ESM) may be held for a positive signal.
3. The third and recently also very popular alternative is to use the crisis and willingness of politicians to introduce or tighten fiscal rules and to establish independent controlling institutions. However, let us talk about the way in which one would be able to lay claims to the vows that politicians had made within the monetary area during the next lecture.