Why government debt is not like household debt
It’s tempting to think that household debt is much like government debt. They’re different. And that’s good because it gives the government some flexibility to manage debt and spur the economy at the same time.
Consider a household where all the income available to pay off any kind of debt is around PHP 100 per annum and the total assets of that household amount to PHP 1,000. If they incur more debt and need to pay more than PHP 100 total per annum, then they will have to earn more revenues or sell some of their assets to pay off those debts.
Of course, they can borrow more to pay off their debts, perhaps as much as PHP 1,000 in total, until the day comes that their entire assets are gone, with the household going bankrupt as debt payments remain unpaid.
Deferring for the moment any discussion on where the debt is deployed, we now shift to governments. It happens that what’s true for households is not necessarily true for governments. Why? Because, as we’ve seen in our previous discussion on debt (See Understanding debt: Why the Philippines is not Sri Lanka), the government can always print more money to pay debt in its currency, and that is the principal difference between the government and a household. A household cannot print more legal tender to pay debt, but the government can, as long as the debt is in its own currency.
Therefore, the government can fund deficits with peso debt (e.g., “deficit spending”) in order to pay for current spending when needed. If deficit spending develops the country and funds growth, then that means that the tax base widens, giving the future government additional tax revenues that can then be used to pay off the debt that funded the growth. Essentially, the government is borrowing now against its future revenues.
This brings us back to the issue of where the debt is deployed. For the household, if the debt were incurred to generate income greater than the interest and principal repayments, there would be no problem. It’s considered an investment, and the household wealth goes up more than PHP 1,000 in return.
The same is true for the government if it invests for the future, borrowing money to develop the country (say, via infrastructure projects) and earn even more tax revenues in the future to pay off such debt. That is very much an investment as well.
Borrowing against future revenues
So, circling back to the point, the government can resort to deficit spending by essentially borrowing against future tax revenues. Households, on the other hand, cannot do the same and will have to borrow against an existing income stream, asset collateral, or both.
Thus, homey rules that may prove prudent for managing household debt can be very counterproductive and deleterious when applied to government debt; it’s as if having low government debt would be a virtue in and of itself.
If such were the case, then that would have simply put the government in a bind and would have limited its ability to stimulate the economy when needed, or deal with national emergencies such as the COVID pandemic.
For the latter, debt loads shot up because of the need to provide relief to the people and vaccinate the general population, clearly something that would have been unavailable if there were very stringent rules on incurring debt tied up to pure fiscal policy or investment returns. Clearly, household debt and government debt are not the same thing and should be treated differently.
MARC BAUTISTA, CFA, is Vice-President and Head of Research & Business Analytics at Metrobank, in charge of the Bank’s macroeconomic, industry, and financial market analysis and research. He loves teaching finance and investments, portfolio management, statistics, financial derivatives, economics, etc. in a university setting. He plays guitar in a rock band and loves learning other languages, especially Spanish, promoting its recovery as a heritage language in the Philippines.