Which methods of reducing government debt have proven to be the most successful in history? Remittances are generally not included. The answer may surprise you.
Fiscal and monetary policy are areas where everyone has an opinion, but few can agree on any given idea. Although reducing debt and stimulating the economy are the overall goals of most governments in advanced economies, achieving these goals often involves strategies that seem to be mutually exclusive and sometimes completely contradictory.
- The government usually does not increase taxes, but issues debt in the form of bonds to raise funds.
- In times of financial recession, the government can repurchase bonds issued. This is the quantitative easing policy of the United States after the 2007-2008 financial crisis.
- Tax increases alone are not enough to stimulate the economy and repay debts.
- There are some historical examples showing that spending cuts and tax increases together helped reduce the deficit.
- Bailouts and debt defaults can also help the government solve the debt problem, but these methods also have obvious shortcomings.
Use bonds to issue debt
Take the issuance of government bonds as an example. The government often issues bonds to borrow money. This allows them to avoid tax increases and provide funds to pay for expenditures, while also stimulating the economy through public expenditures. In theory, they can obtain additional tax revenue from prosperous companies and taxpayers.
Issuing debt seems to be a logical approach, but remember that the government must pay interest to creditors and, at some point, must repay the borrowed money. Historically, debt issuance has provided countries with an economic boost, but on its own, improved economic growth has not been particularly effective in directly reducing long-term government debt.
When the economy is in trouble, such as during periods of high unemployment, the government can also stimulate the economy by buying bonds issued by them. For example, the Federal Reserve has implemented quantitative easing policies several times since November 2008, and plans to purchase large amounts of government bonds and other financial securities to stimulate economic growth and help the recovery after the 2007-2008 financial crisis.of
Many financial experts support a short-term quantitative easing strategy. However, in the long run, it turns out that buying one’s own debt is not more effective than borrowing money to get rich by issuing bonds.
Ways the government reduces federal debt
Interest rate manipulation
Keeping interest rates low is another way for the government to seek to stimulate the economy, create taxes, and ultimately reduce national debt. Lower interest rates make it easier for individuals and businesses to borrow money. In turn, these borrowers spend the money on goods and services, thereby creating jobs and taxes.
Low interest rates have always been the policies of the United States, the European Union, the United Kingdom, and other countries in times of economic pressure, and have achieved a certain degree of success. It should be noted that facts have proved that maintaining zero or close to zero interest rates for a long time is not a panacea for a debt-ridden government.
Implement spending cuts
Canada faced nearly double-digit budget deficits in the 1990s. By slashing the budget (20% or more in four years), the country reduced its budget deficit to zero in three years and cut its public debt by a third in five years. Canada did it all without increasing taxes.
In theory, other countries can follow this example. In fact, the beneficiaries of taxpayer stimulus spending are often hesitant about proposed cuts. When their members and policies are uneasy, politicians are often chosen as offices, so they often lack the political will to make necessary cuts. The political debate surrounding social security in the United States for decades is a typical example. Politicians have avoided actions that would anger voters. In extreme cases, such as Greece in 2011, protesters took to the streets when the government’s faucets were closed.
The government often increases taxes to pay for expenditures. Taxes can include federal taxes, state taxes, and in some cases, local income taxes and business taxes. Other examples include alternative minimum taxes, crime taxes (for alcohol and tobacco products), corporate taxes, inheritance taxes, Federal Insurance Contributions Act (FICA), and property taxes.
Although tax increases are common practice, most countries face huge and growing debts. The higher debt levels are likely mainly due to failure to cut expenses. When cash flow increases and expenditures continue to increase, the increase in income has little effect on the overall debt level.
Reduce debt success rate
By 1994, Sweden was close to the financial crisis. However, by the late 1990s, the country achieved a balanced budget through a combination of spending cuts and tax increases. The debts of the United States were repaid under the leadership of Harry Truman in 1947, 1948 and 1951. President Dwight D. Eisenhower managed to reduce government debt in 1956 and 1957. Spending cuts and tax increases have played a role in both efforts.
Supporting commerce and supporting trade is another way for countries to reduce their debt burden. For example, Saudi Arabia reduced its debt burden from 80% of GDP in 2003 to 10.2% in 2010 by selling oil.
National debt bailout
Allowing wealthy countries to waive your national debt or provide you with cash is a strategy that has been adopted many times. Many African countries have been beneficiaries of debt relief.Unfortunately, even this strategy has its drawbacks.
For example, in the late 1980s, Ghana’s debt burden was significantly reduced due to debt relief. In 2011, the country was once again in debt. Greece received billions of dollars in bailout funds from 2010 to 2011, but after the first rounds of cash injections, things are not much better. The American rescue plan dates back to 1792.
Defaulting on national debt, including payments to creditors in bankruptcy and/or restructuring, is a common and often successful strategy for debt reduction. North Korea, Russia, and Argentina have all adopted this strategy. The disadvantage is that it becomes more difficult and expensive for countries to borrow after defaulting in the future.
Controversy of various methods
To quote Mark Twain: “There are three types of lies: lies, damn lies, and statistics.” In terms of government debt and fiscal policy, this is the most true.
Debt reduction and government policy are polarizing political topics. Critics of every position questioned almost all budget and debt reduction requirements, arguing about flawed data, incorrect methods, smoky accounting, and countless other issues. For example, while some authors claim that U.S. debt has never fallen since 1961, others claim that it has fallen multiple times since. In almost every aspect of any discussion of federal debt reduction, similar conflicting arguments and data can be found to support them.
U.S. Treasury bonds will reach record levels in 2020.
Although countries have adopted multiple methods at different times and achieved varying degrees of success, there is no magic method to reduce debt, which is equally effective for every country in every situation. Just as spending cuts and tax increases have proven successful, default works for multiple countries (at least if the criterion for success is debt reduction rather than good relations with the global banking industry).
Overall, perhaps the best strategy is Shakespeare’s Polonius village Benjamin Franklin supported him by saying: “Neither a borrower nor a lender.”