Wednesday, October 30, 2013

This experience suggests that more notable than any loss of credibility was a simple failure to achieve debt reduction

From A One-Off Capital Levy? from the Financial Times. Profligate governments also tend to be crisis driven governments. They don't plan, they simply address the problem in front of them. When they get close to the cliff they take extraordinary actions which almost inevitably backfire as described below. The root cause is almost always profligate spending and poor planning. Increasing real growth by a single percentage point (reducing regulatory issues, tax burdens, etc.) and balancing the budget (so that you keep from making the financial hole deeper) are the best ways to solve the problem of weak government finances but almost every government will do everything it can to keep from making those hard decisions. As we have seen most recently in Cyprus, Poland and Greece, there is a strong inclination to simply confiscate the wealth of citizens to "solve" the problem. But does it work?
There is a surprisingly large amount of experience to draw on, as such levies were widely adopted in Europe after World War I and in Germany and Japan after World War II. Reviewed by Eichengreen (1990), this experience suggests that more notable than any loss of credibility was a simple failure to achieve debt reduction, largely because the delay in introduction gave space for extensive avoidance and capital flight - in turn spurring inflation.

The tax rates needed to bring down public debt to precise levels, moreover, are sizeable: reducing debt ratios to end-2007 levels would require (for a sample of 15 euro area countries) a tax rate of about 10 percent on households with positive net wealth.
Yikes! And that isn't to get rid of the accumulated debt, that's only to bring it back to the earlier unacceptable levels.

No comments:

Post a Comment