Global public spending to fight COVID-19 and its economic fallout—Just $ 11.7 trillion in the first six months of the pandemic According to the International Monetary Fund, this means that public debt will increase by 9% of gross domestic product on average this year in the world. US budget deficit hits record high $ 3.3 trillion for fiscal 2020-and now Congress is preparing another $ 1.9 trillion relief bill.
National crises, from wars to depressions, have almost always required large deficit spending. But in many countries, including the United States, over the past half century, public debt has not been paid off in times of peace and prosperity. Economists and politicians wonder if this leads to higher inflation, higher interest rates or capital flight. This debate ignores a truly dangerous consequence of high public debt: it undermines confidence in government.
Confidence in government is affected by many factors, including political scandals, economic inequalities, political polarization and the performance of the economy. But an important factor is whether citizens think they are getting their money’s worth for the taxes they pay.
Deficit spending, providing more public services than taxes paid, seems like a bargain. This helps citizens view incumbents more favorably, making deficit spending even more attractive to political leaders. It also increases general confidence in the government.
But there is a tipping point.
When the cost of servicing that debt is a big part of the budget, people start to receive consistently less than they paid for and trust is eroded.
For 40 years, it has been reality in the United States. Data from the Pew Research Center shows that from 1980 to 1998, debt service averaged 12-15% of the total federal budget.
Currently, even with interest rates at historically low levels, debt service accounts for nearly 9% of the US budget. The situation in Japan, Greece and Italy is much worse.
Most of us don’t know the exact relationship between the amount of taxes we pay and the value of government services we get. Instead, we are likely to describe our vague discontent in other ways: the government is inefficient or corrupt. It favors other social groups.
The current era of high US public debt began during the oil crisis and ‘stagflation’ of the 1970s, but endured due to neoliberal supply-side arguments that justified cutting taxes without cutting taxes. expenses.
Between 1947 and 1969, the government balanced its annual budget eight times and recorded a deficit of 1% or less 11 more times. Since 1970, the United States has balanced its budget only four times.
In early 2020, the debt-to-gross domestic product ratio exceeded 107 percent in the United States. — Before any expenditure related to the pandemic. In other words, our public debt now exceeds the total annual output of our economy.
The decline of Americans’ Confidence in Government is roughly correlated with the increase in public debt over the same period (although analysis of the data cannot control for all the factors necessary to prove this point). In the mid-1960s, about 75% of people in the United States said they always or most of the time they trusted government; by 2019, that number had fallen to 17%.
For neoliberal political parties who would like to see the government shrink, such a drop in confidence is welcome. For parties advocating new major social programs, such as Democrats who support Medicare for All or a Green New Deal, weak confidence in the government is crippling.
Voters’ support for major reforms depends not only on the specific characteristics of a proposal, but also on their general confidence in the government to carry it out effectively and fairly. When confidence in government is as low as it is today in the United States, expensive reforms become almost impossible to implement.
Paying off debt seems like the obvious way to restore confidence, but in the short term, repayments crush utilities on the budget, making it an unlikely choice for political leaders, especially now, as COVID-19 is still not under control.
There is an important sign of hope: Nordic social democracies like Sweden and Denmark have been able to avoid serious public debt problems and thus have confidence in the government. In Sweden, the debt-to-GDP ratio was 72% in 1994; in 2019, it had been reduced to 35%.
Denmark presents a very similar pattern: the ratio rose to 78 percent in 1993, and was cut to only 33 percent in 2019. Neither country allowed its debt to get out of hand and confidence in government remains higher in the Nordic countries than most other developed countries.
The massive spending required for COVID-19 relief has not caused the public debt spike in the United States, but it could make matters worse.
With the pandemic behind us, we still have to find a way to address the debt and the resulting crisis of public confidence.
Edgar Kiser is a sociologist whose research focuses on the development of electoral institutions, the causes and consequences of war, the historical development of tax systems and contemporary tax systems. He is currently Visiting Professor at NYU Abu Dhabi and Professor Emeritus at the University of Washington. This piece was produced in partnership with Known magazine.
The opinions expressed in this article are those of the author.