Economic analysis of high government debt and austerity measures

While High Government Debt Levels Could Hasten Economic Recovery Post Recession, There Are Many Long-Term Negative Consequences Crowding Out Investment =» Lower Output & Income ~ A growing portion of people’s savings would be diverted to purchase government debt rather than toward investment in productive capital goods. Higher Interest Payments = Higher Tax Rates & Lower Output & Income — Government may be forced to raise marginal tax rates and / or reduce spending on other programs to meet interest payments. e Reduced Ability to Borrow > Less Policy Flexibility — In case of economic downturns or international crises, government may not be able to raise substantially more debt. e Increased Chance of Sudden Fiscal Crisis Social / Economic Disruption — Investors may lose confidence in government’s ability to repay debt & interest without causing inflation. (@E www.kpcb.com Source: Congressional Budget Office, “Federal Debt and the Risk of a Fiscal Crisis.” 7/10. USA Inc. | Consequences of Inaction 425 Lessons Learned: For Countries Burdened by High Debt Levels, Austerity Measures are Necessary 208 Gross Debt Deficit as ° 2009-2010 Austerity Measures New Revenue Streams % of GDP as % of GDP Greece ti Ireland Spain Portugal (@ www.kpcb.com 14% 11% 11% 113% 66% 54% e Wage freeze & bonus cut of 14% on all public sector employees e Reduction in government contract workers e 11% reduction in pensions & Increase in retirement age to 65 from 58 e 5-15% pay cut & 4% benefit reduction for all public sector employees e $1.5B+ broad spending cuts in healthcare & infrastructure e Hiring freeze for public sectors e Increase of retirement age to 67 from 60 e Total budget cut of $70B 10-13E e Joint IMF—EU bailout of $146B e Tax increases for VAT (+2%) / fuel / alcohol / cigarette (+ 10%) e Clamp down on tax evasion e Carbon tax on fuel e 1% tax rise on personal income about 120K euros e Sold $7B in new bonds 9% 78% e Wage freeze on all public sector employees e Reduce state payroll via attrition e 50% bonus tax on top bank executives e Privatize state-owned industries Source: Eurostat, European Commission, IMF, New York Times, Financial Times, BBC, Wall Street Journal. USA Inc. | Consequences of Inaction 426 HOUSE_OVERSIGHT_021054