Budget ceiling is a good thing

Updated: 2013-10-26 06:55

By Richard Harris (HK Edition)

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The recent political row in the US had the Republican Party refusing to approve a rise of the government's debt ceiling above $16.7 trillion. They fought hard for the unwinnable and have now conceded defeat with a humiliation normally reserved for the day after a bad election.

Many illustrious commentators have regarded the budget ceiling as a bad thing because the measure was used as a point of political leverage and they argue that it should therefore be removed. They are not thinking beyond next week. It is true that the measure was used as a stick to try to beat up the president over Obamacare, the new US medical program, but it was used as a legitimate political tool as for any other point of leverage.

The budget cap forms an important role in keeping government spending in check by implying that no new spending can occur without tax cuts. It may not be a perfect check - it might be little more than a circuit breaker - but with excessive government debt being the biggest single threat to future global economic wealth, having a budget ceiling cap is actually a good thing.

Threats of negative outlooks, potentially leading to downgrades in creditworthiness by ratings agencies such as Fitch, are equally nonsensical. The US is a wealthy country and will not default on its debts, even if some politically inspired delay in payment is possible. The economy is lightly taxed overall compared to most developed economies, especially for fuel at the filling station. Shale oil and gas is likely to make the US an exporter of energy by the latter part of the decade. The world will continue buying US Treasury bills and the US dollar will continue to go up and down in a narrow and not crisis range against other major currencies. Surely a measure to halt runaway government debt is likely to improve the creditworthiness of an economy, not weaken it.

Europe is suffering from an inability to properly control its debt position with no means to cap it. A generous welfare entitlement applied during good economic times is almost impossible to remove when times are bad. For example, public support for working families is gradually transferring private employers' costs for employees onto the state.

This is likely to continue as the European population becomes older and more infirm with the only circuit-breaker here being bankruptcy resulting in intense pain. Greece has seen a 25 percent temporary decrease in the size of its economy as a result of austerity being thrust upon it when the money ran out. In Cyprus, anyone with a bank account involuntarily recapitalized the banking system by forfeiting 40 percent or more of their uninsured cash deposits.

Budget ceiling is a good thing

Poll readings show the Republicans to have lost a massive 20 percentage points of support during this stand-off, showing what the American people think of the Washington Village playing hide and seek, while keeping everyone else on hold. President Barack Obama does not escape undamaged. Ongoing score-settling by his opponents now limits his chance of passing any contentious legislation for the rest of his term. He is a lame duck so any chance of him improving his legacy as president is now sorely impeded.

The US administration has now signed the bill to get the government moving again - as we all knew they would. The can has been kicked down the road to February, as spending has been extended until then. By February, the can will be rather rusty. It is unlikely that the Republicans will have the stomach for a similar bruising fight. We might well see negotiation and agreement on a proper annual budget as is traditional. The ceiling is unlikely to disappear - it is a useful tool for both sides - but it does need to become a crawling ceiling; with automatic adjustments for inflation and interest payments to prevent the need for frequent votes.

The Republicans have been fighting an important battle against runaway deficits; just not in an intelligent way. They must concentrate on getting elected in order to gain the power to run the economy how they want, though they have not increased their electoral chances in the last few weeks.

The great secret of democracy is that spending is popular with voters and taxation is not. The debt ceiling is an elegant way of getting around that sensitive problem while retaining some control over the overall budget. This is an age-old lesson - after all, when the British tried to increase taxation, they lost the American Colonies.

The author is chief executive of Port Shelter Investment Management.

(HK Edition 10/26/2013 page1)