According to the BBC, Greece has unveiled major spending cuts. In my commentary below, I hypothesize a way to calculate a “future going burden” for countries based on data in the BBC article (i.e. based on debt as a percentage of GDP and deficit as a percentage of GDP).
The article also notes the cuts come with an increase on taxes – notably a 90% tax on senior bankers. “Other proposals include a cut in defence spending, pay and hiring freezes for public sector workers, and the closure of a third of Greece’s overseas tourism offices.”
These pro-cyclical measures may have the effect of worsening the economy by lowering employment, slowing consumption. Fiscal policy is necessary to reduce the deficit because Greece has no monetary policy as part of Eurozone. Most Keynesians would advocate counter-cyclical policies – namely increased spending.
In terms of fiscal policy, I advocate greater government spending that assists with redistribution of wealth, namely welfare, health insurance, infrastructure, et cetera, particularly redistribution that aids the impoverished or impecunious. I concurrently advocate reducing spending that does not assist with the redistribution of wealth – less government spending on “top-tier” wages (i.e. senior management), high-profit contracts, etc. Of course, this is not an easy proposition – practically, logistically, politically. However, the underlying concept behind a sound fiscal response to a reduction in the ratings of ones debt is to make sure that everyone burns. But not too much.
The BBC article also notes the budget as percentages of GDP and debt as percentages of GDP, as follows:
Country: Debt as % of GDP (Budget deficit as % of GDP) [Future going burden*]
UK: 68.6% (13%) [5.75]
Greece: 112.6% (12.5%) [5.81]
Spain 54.3% (11.25%) [5.12]
Ireland: 65.8% (10.75%) [5.05]
Italy: 114.6% (5.3%) [3.65]
Germany: 73.1% (3.5%) [2.92]
(Sourced from European Commission/Economic forecast autumn 2009)
* The “future going burden” above is the name I have given to a rudimentary calculation I’ve conjured here, and represented in the square brackets above, namely:
This calculation is an objective measure of the going-forward burdens of the countries based on GDP, debt and budget deficits. It presumes compound interest on that debt (obviously countries with a perceived lower chance of default could have attract creditors with lower interest rates, thereby reducing the burden of the debt – and risk of default). While I leave it to the reader to evaluate whether there is any value for this calculation — it is food for thought based on my intuitive understanding of compound interest — this metric may be of use for evaluating risk one to five years from now (i.e. the latency of the response by the market to actions taken by the state plus the latency of the response to feedback given to a state of a future downward trend in creditworthiness — viz. a high future going burden).