Our perception is that the government, as a financial entity, is just like you and me, at the least, or like some huge corporation at the most. That is totally inaccurate.
Basic financial responsibility and prudence—according to the financial-literacy gurus—is that personal debt is not necessarily a good thing. They are right. If you have ever paid off a home mortgage, you know the satisfaction that comes from finally owning your house free and clear of debt. Likewise, if you fail to keep up with your car payments, usually, a couple of nasty looking men will come and take the car away. If you fail to pay your credit-card bill, the bank will not loan even one centavo more. None of that applies to government.
In the entire history of the modern world, no government has ever actually paid off its debt. When a government, like Greece or Argentina, goes into default and cannot pay on the debt, the debt is “restructured” in one way or another. Try telling the bank you really need your car and promise on the heads of your children to continue payments in a few years.
The lender—public or private—may take over an airport or other revenue-generating asset. But it is not like the German banks now own a few Greek tourist islands. While a state-owned Chinese company took control of Sri Lanka’s Hambantota maritime port, it is not like they moved it to Shanghai and sold it to someone else like the bank will do with your car.
We are all supposed to live within our means, trying not to spend more than we make. That does not apply to the government. Of the 175 governments measured in 2017, only 10 could be considered to have not spent more than they took in. The reason that governments can easily spend more than they make—unlike you or me—is that it is only under the most extreme circumstances that a government borrows more.
A bank decides first if you or I are going to be able to pay our debt based on both current and future income. Further, the bank looks at your assets and collateral for the loan. Those issues are more fluid for governments. Lenders to governments are actually only concerned about the interest rate the government will pay and if that government can pay the amortization, since they know the loan will never be paid off. A government usually pays off one loan by borrowing new money.
Granted, nations like the Philippines that have good economic growth over a few years can reduce their overall debt. However, they usually reduce foreign debt—as the Philippines has done—and borrow domestically, which is better for the economy. In addition, domestic borrowing protects against a currency problem, like the one that started the 1997 Asian financial crisis.
Through 25 years, the Philippine government went on a spending and borrowing spree like a drunken sailor and had nothing to show for it except an economic hangover. With the financial restraint of the Arroyo and Aquino administrations, government finances are healthy. Now is the time for the government to loosen up with an increase in prudent borrowing and efficient spending.
The one similarity that should be made with the government and private business is that, when conditions are good, that is when you take more risks, expand and push for wealth creation. “Build, Build, Build” is not a cute slogan. It is a vital economic policy to move the Philippines into another level of economic growth.
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