Case Study: Assessing Sustainability of Fijis Public Debt:

Governments role can generally be categorised into the following four categories, (i) provision of public good; (ii) redistribution of income; (iii) provision of social safety nets; and, (iv) the stabilisation of the economy. To undertake these roles, governments need finance. Hence they table annual budgets outlining their expenditure outlays and revenue levels and sources. When the expenditure demands are equal to the revenue projections, it is said that the budget is balanced and that the government is neutral, that is, its influence on the economy has been neither expansionary nor contractionary. However, contrary to the refrain of some (classical) economists, a balanced budget may not necessarily be good. A balanced budget undoubtedly implies that debt levels are stable and provides some level of expenditure discipline. However, a balanced budget may, in fact, be restrictive in some ways and may lead to depression. This is particularly true for developing countries in their early stages of development when the government needs to play a major role in leading growth and investment. Similarly, a surplus budget is also generally regarded as being restrictive in its effects on the economy, and may be inflationary. On the other hand, a deficit budget could either be restrictive or have a positive effect on the economy, depending on how the instruments of the budgetary policy are handled. These instruments include expenditure, taxation, borrowing and debt repayment. Prolonged and rising deficit can be costly and is directly related to debt level and thus policy makers often debate on fiscal adjustment.2 Therefore deficit and debt reduction are twin targets of any government. Deficit and debt reduction becomes an issue once the two are beyond sustainable limits. That is, it may be difficult to repay it. The issue of sustainability has received increasing attention from economists and policy makers in recent years. The concept of sustainability has three important elements. First government needs enough resources to ensure its ability to carry out its functions. In this case sustainability analysis determines whether a current fiscal policy can be maintained in the longer run. The second element deals with the implications for other macroeconomic variables, thus has a direct effect on economic growth. The third element relates to the issue of affordability. Therefore, the goal of policy makers should be to ensure that the cost of debt is in line with a jurisdictions economic and fiscal base. Historical data on world economy reveal that after the World War I, Germany, Poland, Austria and Hungry were in major fiscal crisis with unprecedented level of public debt coupled with very high inflation levels. In the longer run, rising debt levels and poor economic performance could tarnish government credibility and thus private investors would be unwilling to hold government bonds and securities. Prior to 1997, Fijis debt level reached an unprecedented level of 53% of GDP. The government respondent immediately and sold off one of its prime asset to bring down the debt level. This practice, however, has its own limitations. Governments cannot always resort to asset sales to bring debt level to sustainable levels. Rather, it must ensure that the economy grows so that not only would there be more money with which to reduce the debt, but there would also be increased revenue from this growth which would be used to finance the expenditure resulting in a lower deficit. While expenditure management is an integral component of a broader strategy for debt management, we also need to reexamine our tax rates structure to ensure that we are not moving too fast in terms of reducing it. Furthermore, borrowings must be made in line with growth projections as this determines to a large extent, the ability of the government to repay.

Required:

a.) With reference to the stabilisation role of the government, discuss your views what instruments of budgetary, fiscal and / or monetary policy should additionally be introduced to stimulate economic growth after covid-19 pandemic

b.) Discuss your views how government can use debt so that it is at sustainable level

c.) Fijis Debt-GDP ratio is around 49% and it will increase even more after the COVID-19. With reference to what has been covered in the class regarding the sustainability debt level, discuss weather Fijis debt is at sustainable level. Why or Why not?

d.) What consequences can arise when the budget deficit and government debt is beyond the sustainable level