Debt Sustainability and Fiscal Policy: Rescuing the Rescuers

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Table of Contents

Introduction
Governments are the problem of a possible new crises
The Need to Reduce Deficits and Debts and the Issue of Debt Sustainability
Appropriateness of a Sharp Structural Fiscal Tightening
References

Introduction

The financial crisis experienced in the period between 2007 and 2008 was a great shock and strain to most of the economies. This financial crisis occurred as a result of the various economies possessing a lot of fictitious wealth such as the wealth gained from excessive borrowing from international bodies so as to try and bridge the gap between excessive spending by governments and firms, which result to very high budgets, and the available financial resources for the governments and the firms.

The great difference between the available financial resources and the high budgets resulted to a large deficit of finances for fitting into the budget, forcing the governments and firms to lump into a state of excessive borrowing, a factor that has left most of them, especially the large countries, in great debts (Reinhart & Rogoff 2008).

The global economy, especially the economy of the UK, was seemingly very stable before the year 2007 as all the financial undertakings of different economies seemingly thrived fairly. This was not really the case since the UK always got into a state where its budget was higher than the available financial resources and there was always a deficit in the amount required in the budget.

Since there were a lot of national and international financial institutions willing to help the government out of the crisis it was facing due to the deficits, the government always found itself borrowing for the sake of bridging the gap brought in by the deficits.

This continued for a long time and each time, the government made its budget in a manner that gave provision for inclusion of borrowed money for meeting its budget. This forced the government into a state of great debts and inflated budgets as its budget included repayments of the borrowed money and its interest rates.

This further resulted to a state of increased deficits in the budgets resulting to more borrowing. In the long-run, the nation found itself so enormously tied up in debts in a manner it could not help itself out. In the same way, the government seemed to have a lot of wealth within its possession but when compared to its debt burdens, it actually had very little to be counted as government wealth. This situation continued and reached its climax at the period between 2007 and 2008 (Wolfe 2010).

Towards the end of 2008, the state had experienced a lot of financial crisis as a result of the high debt burdens and this had recessive effects on the economy. There was increased budget expenditure yet very few financial resources for the governments, a state that forced the governments into more borrowing and hence a presence of fictitious wealth in their economies since much of the wealth was equivalent to the debt burdens the governments were in.

This way, the government experienced a gradual effect of the financial crisis since they ended up borrowing too much and not being able to repay the debts resulting into recession which got to its climax towards the end of 2008 when the financial position of most of the economies was the lowest. The recession had very adverse effects on the economies and the societies at large as it resulted to increased prices of goods and services, low unemployment rates as well as high interest rates (Porter 1990).

With the financial crisis being experienced then, there was a greater threat of a possible depression occurring in the global economy, an event that could have been disastrous for all the involved economies and for the global economy at large. There was a need for the governments to take action and reverse the effects of the financial crisis hence avoiding an instance of a depression occurring. In this way, the governments joined hand and got well coordinated in taking action against that event.

With proper coordination, the involved governments were able to overcome the effects of the financial crisis and to save the world from a possible disaster that could have had very severe effects on every economy and even every business in the affected areas and in the world at large (Wennekers & Thurik 1999).

Governments are the problem of a possible new crises

Sovereign debt crisis is the constraint experienced by many different countries and organizations that are tied up in heavy debts borrowed for the sake of bridging the gap between the available financial resources for meeting the budget and the actual high amount required to meet the requirements of the budget.

In efforts to try and maintain progress for their countries, governments have found themselves so ties up in great debts that further inflated the amount required in the budgets due to increased interest rates that have to be budgeted for and which end up placing the countries in a vicious cycle of being in debts.

Increased debt burden usually forces the governments to be in a state in which it cannot be able to pay the debts and has to rely on international policies to help it out of the debts. This is one of the main problems that have resulted to various instances of financial crisis in most of the countries and even globally in most of the economies (Alesina & Ardagna 2008).

Recent studies have shown those economic crises encountered in most countries are a result of different reasons ranging from beliefs, culture and social influences. This influences result to negative financial crisis. People are also made to believe that credit or debt is inevitable for any financial growth, so people get a lot of loans which accumulate over the years. These debts have to be paid regardless of the duration of time they will take before they are cleared (Kelly & Amburgey 1991).

International economic crisis study shows that currencies may even crash or bring about banking crisis and inflation. This affects the prices of goods, trade, exchange rates of currencies, interest rates on goods purchased on credit or on loans And local debt. Investors have now almost relied on credits from foreign currency instead of relying on local or domestic borrowing. This can leads to increased interests on borrowers (Davidsson 1995).

War is also another major cause of economic crisis. This is because it causes economic, social instability of a country. People in these regions cannot be able to do business or trade because of insecurity .transport and communication breakdown can also be encountered in war hit regions or countries which can affect the economy of any state (Herbert & Link 1982).

Countries that are reliant on trade, tourism, can be easily be hit by a crisis when external or internal war is experienced in the country .examples of this is during the second world war when countries were badly hit by crisis (Webster 1994).

Global financial crisis also show that it has weakened the banking sector in a big way, especially in third world countries .though, still in developed countries, debt is a much bigger problem. The rate or the percentage of GDP is relatively low on developing countries than on developed countries. This reduces the risks on developing countries (Alesina and Ardagna 2008).

The Need to Reduce Deficits and Debts and the Issue of Debt Sustainability

The government inter-temporal budget constraint is the constraint experienced by a government due to the presence of debts within its economic setup resulting from currently borrower financial support used to meet the deficits within its budget and the debts inherited from past governments, especially in form of repayment of the debts.

This and the fact that the government always has a lot of spending to do causes that government to always seek for more financial aid so as to meet its requirements and its budget further plunging it into a state of more debts (Alesina & Ardagna 2008).

Deficit in the budget is the amount of finances that is less that the required amount so as to meet the full budget. It is the difference between the available financial resources, which usually are never enough, and the actual amount required so as to meet the full budget for the government.

There are different types of deficits, primary deficit, structural deficit and cyclical deficit. Primary deficit is the difference that occurs between the current expenses and the total current revenue from all types of taxes for the government. On the other side, structural deficit are the deficits that remain across the business trade process (Coviello & Jones 2004).

The only way the country can resolve this problem is by improving the institutional set up. This process may require time and effort but can be solved. If possible, the country should also reduce the amounts of debts from foreign debtors (Sproul 1995).

Borrowing can also be made safer by avoiding excessive borrowing. This is a major way that can reduce the risks of debt crisis. Having strategies and concrete plans before borrowing can help to reduce over borrowing which leads to mismanagement of funds and unnecessary budgets. Finances should always be used for projects that will generate income or returns which can be able to pay the interests and make profits making this borrowing reasonable if it can be able to pay the loan (Alvarez and Busenitz 2001).

If the country is borrowing from abroad or from international bodies, it should consider whether the projects that they want to fund have higher social return than the interest of the fund. Also, it should consider whether the project will be able to generate the amount of foreign currency able to service the debt considering the time deadline or scheduled contract time.

The country can reduce the risks of debt crisis by ensuring regular monitoring of account surpluses. Proper money regulation and balancing or budgets can be of great help in reducing debt crisis in any developing country. A country may opt to cut off international or domestic debt market (Burda & Wyplosz 1997).

It is the government’s obligation to curb debts and deficit in order to avoid economic crisis in the country. This can also help in stabilizing the economy of a country and avoiding risks of excessive borrowing (Covin & Slevin 1989).

Due to various factors facing the country such as unbalanced demographic characteristics resulting to high unemployment and overdependence on the employed, low incomes, low GDP and high expenditure for individuals and the government, the government has continuously experienced a deficit in its budgets since its revenues are always way below their expenditures and their plans for the fulfillment of their goals and objectives for a financial year in their countries (Verheul et al. 2002).

More important to note is that the government has a lot of financial challenges facing it such as high poverty indices and low development and hence is always trying to improve the financial positions of its citizens and the nation and to encourage the course of achievement of development and in this way, it always end up with a greater need to spend more than its revenue and all their financial resources can cover (Murphy & Hill 1996).

This way, it ends up with a budget that is way too high compared to its financial capabilities and hence it always end up depending on borrowing from international bodies such as the World Bank, the IMF and the developed countries so as to try bridge the gap between its needs and its capabilities (Porter 1990).

The only problem with the over-dependence that has been noted in countries on financial borrowing is that it lenders the borrowers into a continuous state of being in debts as they always owe their lenders more than they can be able to pay at any one given time (Reinhart and Rogoff 2008).

Due to this problem of being in a continuous state of debts, there is a need for the government to address the issue of debts and formulate strategies that will ensure that the current debts are reduced as well as establishing ways of reducing the deficits present in the budgets.

The reduction of deficits can be achieved through increasing the sources of revenue, reducing expenditure through prioritization and even seeking for other sources of funding such as the private sectors within the nation instead of seeking for external aid which is costly (Wolfe 2010).

The reduction of the deficits in the budgets will help reduce the rate of borrowing and in return help curb the instances of debts for the country as well as the problem of debt sustainability (Smallbone & Welter 2001).

Appropriateness of a Sharp Structural Fiscal Tightening

Many governments in the developed and developing countries have been experiencing a great financial crisis due to the overall effects of the global financial crisis and various other global factors. The most affected countries are the developing countries which have been plunged into alarming instances of overwhelming debts that have very serious effects on their financial positions currently and in the future (Saunders 1994).

All the countries, on the other side, have been faced with a situation in which they are unable to implement their policies and face a great public outcry as a result (Webster 1994).

In these hard situations, many the governments has been left with no choice rather than establishing strategies to try and curb the instances of the financial crisis in the country.

This way, the government has formulated and implemented sharp structural fiscal tightening strategies aimed at bringing the economy to a stable position. However, depending on the way these strategies are implemented, they have been found to either have very helpful effects or to result to more problems by encouraging double-dip recession (Madhok 1997).

In the instances of proper timing and properly formulating the policies that allow the implementation of the fiscal tightening strategies, the governments have been able to overcome the instances of recession and lift their financial positions and stabilize them (Porter 1990). On the other side, some of the methods used for implementation of the strategies just result to worsening of the situation due to wrong timing and improper implementation of the strategies, a factor that results to further recession in the economy (Wolfe 2010).

References

Alesina, A. & Ardagna, S., 2008. Large changes in fiscal policy. Web.

Alvarez, S. & Busenitz, L., 2001. The Entrepreneurship of Resource-Based Theory. Journal of Management, 27 (6), pp. 755-775.

Burda, M. & Wyplosz, C., 1997. Macroeconomics: A European Text. New York: Oxford.

Coviello, E. & Jones, V., 2004. Methodological issues in international entrepreneurship research. Journal of Business Venturing, 19 (4), pp. 485-508.

Covin, J. & Slevin, P., 1989. Strategic management of small firms in hostile and benign environments. Strategic Management Journal, 10 (1), pp. 75-87.

Davidsson, P., 1995. Culture, structure and regional levels of entrepreneurship. Entrepreneurship and Regional Development, 7 (1), pp. 41-62.

Herbert, R. & Link, N., 1982. The Entrepreneur. New York: Preager.

Kelly, D. & Amburgey, T., 1991. Organizational inertia and momentum, a dynamic model of strategic change. Academy of Management Journal, 14 (5), pp. 591- 612.

Madhok, A., 1997. Cost, value and foreign make entry: The Transaction and the firms’ Strategic Management Journal. New York: Willey.

Murphy, G. & Hill, C., 1996. Measuring performance in entrepreneurship research. Journal of Business Research, 36 (1), pp. 15-23.

Porter, M., 1990. The Competitive Advantage of Nations. New York: Free Press.

Reinhart, D. & Rogoff, S., 2008. This time is Different. Web.

Saunders, J., 1994. The Marketing Initiative. London: Prentice-Hall.

Smallbone, D. & Welter, F., 2001. The Distinctiveness of Entrepreneurship in Transition Economies. Small Business Economics, 16 (4), pp. 249-62.

Sproul, N., 1995. Handbook of Research Methods: A Guide for Practitioners and Students in Social Sciences. 2^nd ed. Methuen: Scarecrow.

Verheul, I., Wennekers, S., Audretsh, D. & Thurik, R., 2002. An Eclectic theory of entrepreneurship: Policies, institutions and culture. In: David Audretsch, Roy Thurik, Ingrid Verheul and Sander Wennekers 1997. Entrepreneurship: Determinants and Policy in a European–US Comparison. Boston: Kluwer Academic Publishers.

Webster, L., 1994. Lending for microenterprises: A review of the World Bank’s portfolio. Washington, D.C.: FPD Note 23, World Bank.

Wennekers, A.R.M. & Thurik, A.R., 1999. Linking entrepreneurship and economic growth. Small Business Economics, 13 (1), pp. 27-55.

Wolfe, M., 2010. Emergency Budget: Special edition. Web.

Wolfe, M., 2010. Osborne bets tough Fiscal Stance will not stifle growth. Web.

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