Why and how should the public debt be reduced?

Only an increase in tax revenues can reduce the burden of debt while maintaining a quality public service and supporting the economy through public spending

Whether we speak of austerity or the debt consolidation- http://www.astridmueller.com/blog/celebratepossibilitycall-04-15 right here, the contraction in public spending is everywhere brandished as a remedy for debt. Thus, while Germany announces a plan of exceptional rigor, in France the Prime Minister has just announced a sharp reduction in spending and is considering the inclusion of the deficit “zero” in the constitution.

The argument is based on an assimilation of the public accounts and the household budget: when one is too indebted, one must reduce his lifestyle at the risk of bequeathing a debt to his children. However, in 2008, the French public administrations are indebted to the tune of 1 685 billion euros while their financial assets amounted to 822 billion and their non-financial assets to 1 450 billion (including 624 billion land, housing, and equipment ). It is not a debt that they leave to future generations but a net wealth of 587 billion, which adds to the accumulated human wealth especially in education and health.

The Stability and Growth Pact postulates that indebtedness is excessive when the share of debt in the national income (GDP) exceeds the arbitrary threshold of 60%. But this share, which was barely 21% in 1980 and 35.2% in 1990, reached 55.5% in 1995, 67.5% in 2008, and 78% in 2009. From our point of view, it is crucial to reduce public debt because of its redistributive effects from the poor to the rich. In fact, part of the taxes levied on all taxpayers partly serve to pay the debt burden (39 billion euros in 2009), whereas they could have been used for other purposes such as health or education, while this interest is paid in part to rentier taxpayers who hold 35% of the public debt. Public finances thus serve as an intermediary for a transfer of income to the wealthiest households.

“REFUND THE TAX SYSTEM”

To find remedies for excessive government debt, one must look for the root causes of the continued rise in the debt burden, even before the recent effects of the crisis.

Some argue that it is the explosion of public spending that is in question, but the figures belie this diagnosis: the share of public expenditure in GDP has been relatively stable for 25 years, going from 52% in 1985 to 54% in 1995, and 53% in 2008. In fact, the increase in the share of the public debt in GDP is explained first by the lack of economic growth and the economic crises of 1993 and 2008.

Then, the very high-interest rates that we had until the early 2000s inflated the cost of debt and caused a snowball effect, the public administrations to go into debt to repay the interest on the debt.

Finally, tax reforms have helped to increase the burden of debt. The share of government revenue in GDP has steadily declined from over 22% in 1981 to 17% in 2008. In parallel, the structure of the levies has changed. Numerous tax loopholes, changes in income tax scales and capital income tax exemptions mainly benefited well-off households, while the growth of the CSG was borne by all households. These changes in taxation, partly responsible for the increase in deficits, have not had the expected effects on employment and growth. The tax benefits granted to affluent households have allowed them to save more, ultimately stimulating little domestic demand.

We can, therefore, worry about the appropriateness of the announced public spending contraction measures. The crisis is indeed not over and this risks further weakening growth. It would be more reasonable to overhaul the tax system so that well-off households, who have seen their incomes rise both through tax cuts and debt interest, again contribute to the financing of general government by tax rather than their savings. Only an increase in tax revenues can indeed reduce the burden of debt while maintaining a quality public service and supporting the economy through public spending.