The Economist - USA (2021-02-13)

The Economist February 13th 2021 69

Finance & economics

Emerging economies

Some pleasant fiscal arithmetic

F

inance ministersof yesteryear would

have been shocked by the amount of

borrowing their successors must now con-

template. But they would have been just as

gobsmacked by how cheap that borrowing

has turned out to be. In many countries,

the interest rate on government debt is ex-

pected to remain below the nominal

growth rate of the economy for the foresee-

able future. In other words, the “growth-

corrected interest rate”, as some econo-

mists call it, will be negative. That will be

the case in all rich countries in 2023, ac-

cording to projections published earlier

this month by s&pGlobal, a rating agency.

This scenario has prompted some econ-

omists, such as Olivier Blanchard, a former

chief economist of the imf, to rethink the

fiscal limits of countries like America, Ja-

pan and the euro members. Governments

should not “focus on some magic number

for the debt-to-gdpratio”, Mr Blanchard

said last month in a lecture hosted by Ash-

oka University in India. These numbers

“have been counterproductive in the past;

they would be even more [so] now”.

It is not only in rich countries, however,

that the fiscal arithmetic looks topsy-tur-

vy. In 53 of the 60 biggest emerging econo-

mies, the interest rate is likely to fall short

of the growth rate. In some cases, spectac-

ularly so. s&pexpects the growth-correct-

ed interest rate in 2023 to be -3.6% in India,

-6.5% in China and -33.8% in Argentina

(see chart 1).

That raises an obvious question: should

emerging economies also rethink their fis-

cal limits? Some have been quick to do so.

India’s budget this month envisaged a def-

icit of 9.5% of gdpthis fiscal year (the over-

all deficit, which includes state finances,

could reach 15% of gdp, reckons JPMorgan

Chase, a bank) and offered no plan to bring

it below the 3% limit prescribed by past fis-

cal rules. The latest economic survey by the

government’s chief economic adviser

points out that India’s interest rate has

been below its growth rate “by norm, not

by exception”. Quoting from Mr Blan-

chard’s work, the survey tries to “provide

the intellectual anchor for the government

to be more relaxed about debt and fiscal

spending during a growth slowdown or an

economic crisis”. But although doveish fis-

cal maths is the norm in many emerging

economies, finance ministers must also

worry about the exceptions to it.

When interest rates fall short of growth

rates, the budgetary algebra becomes a lit-

tle contrary. Governments can keep debt

steady, relative to the size of the economy,

even if they consistently overspend, as

long as their budget deficits are not too

large. If their deficits (excluding interest

payments) exceed this limit temporarily,

their debt ratio will rise temporarily. But it

will then gradually decline to its previous

level. If their deficits move to a permanent-

ly higher level, the debt ratio also settles at

a higher level. But it will not snowball, be-

HONG KONG

Governments in the rich world have stopped worrying about their debt. What

about those elsewhere?

→Alsointhissection

70 Oilgushesupto$60

71 Isinflationpickinguppace?

71 FreshbloodatEuropeanbanks

72 Buttonwood:Bettingagainstbubbles

73 Washingmachines—agrubbytale

74 Free exchange: “Structural” monetary

policy

Asnowball’schance

Effectiveinterestrateongovernmentdebt

minusnominalGDPgrowth,percentagepoints

2023 forecast

Source:S&PGlobalRatings

1

South Africa

Mexico

Brazil

Russia

Thailand

India

Malaysia

Indonesia

Tu r ke y

Philippines

China

Argentina

-30-40 -10-20 100