In the city center of Warsaw stands a billboard displaying data on the national debt. It shows the debt/GDP ratio which is a good and honest measure of debt. However, it also displays debt in Polish zlotys as well as a "hidden debt" measure. These misleading figures bias the debate in favor of a neo-liberal ideology by scaring viewers into thinking the debt is getting out of hand.
Before we go any further, let's take a step back and define debt.
What debt is
Debt is what you owe to others. There are different types of debt, and one of them is financial. Debt has four main features:
1) their value (for financial debts, you throw in here interest, face value, par value, interest rate, etc.)
2) their deadline
3) the consequences for not meeting the deadline
4) their asset counterpart
Whereas the first three are rather straightforward, the fourth one requires some clarification. If you have a mortgage for a house, your debt's counterpart (mortgage) is your house. If you used your credit card to pay for an expensive night out drinking, then the counterpart of your credit card debt is your night out drinking (although it is, by now, only a memory). If you own a business and it has a bank loan contracted in order to buy some machinery, then that machinery is your counterpart.
All debt is not equal. All debt should not be treated equally. If a person has a credit card debt that is 80% of their annual income, the situation is much more worrisome than if that same person has a house mortgage that is 300% of their annual income (someone earning 50 000 PLN a year and having a mortgage of 150 000 PLN would be in that situation). Apart from the hopefully lower interest rate on the house mortgage, a house mortgage has an advantage over a credit card debt: if the indebted person were to become invalid and unable to work, they could sell their house whereas they would have a hard time selling back things they bought with their credit card (for they are mostly consumer goods).
What is national debt?
There are two main approaches to calculating national debt (more info on the second approach in the appendix). What is commonly understood as national debt is called general government gross debt in economic jargon. This basically is constituted of the balance of bonds the government emits (In the United States, they are called treasury bonds. They are promises to pay an amount of money plus some interest in the future in exchange for some money at the moment the bond is emitted).
What is meant by general government is all levels of government, including social security funds. The general government gross debt measure is used as it represents the financial position of the government given that it will not liquidate its non-liquid such as gold reserves, currency reserves, special drawing rights, pension scheme assets, etc. In other words, the general government gross debt is the debt that has no particular asset associated with it.
Furthermore, the general government gross debt has serious consequences in case of non-payment (and late payment, for this kind of debt, is the same as non-payment): the loss of confidence in the value of the bonds that government emits with a resulting high raise in interest rate for the debt.
Finally, general government gross debt is made of many smaller parts with different deadlines, amounts, interest rates, etc. The deadline for these pieces of debt is known by all. This is not the case for, let's say, pensions to be paid to workers 35 years from now.
Furthermore, the general government gross debt has serious consequences in case of non-payment (and late payment, for this kind of debt, is the same as non-payment): the loss of confidence in the value of the bonds that government emits with a resulting high raise in interest rate for the debt.
Finally, general government gross debt is made of many smaller parts with different deadlines, amounts, interest rates, etc. The deadline for these pieces of debt is known by all. This is not the case for, let's say, pensions to be paid to workers 35 years from now.
The Polish national debt?
National debt is a risk to be managed. Let's see a panic chart of how the national debt behaves in polish zlotys (Source: IMF World Economic Outlook):
From 1995 to 2013, the Polish national debt went from 165 billion zlotys to 945, a raise of 472%. If the numbers seem panicking and out of control to you,t that is exactly why I called this last chart a panic chart.
However, that chart is at best misleading, at worst propaganda. National debt should be put in context, and national GDP is a wonderful context for that: the gross domestic product represents the economic activity a state can tax to generate revenues. Let's compare the national debt to the national GDP (Source: IMF World Economic Outlook):
If you think that the two lines move pretty much in the same manner, you are right: let's see how the ratio of debt/GDP behaves in a relatively stable fashion for Poland (Source: IMF World Economic Outlook):
From 1995 to 2013, the debt/GDP ratio raised by 9 percentage points. Let's see how Poland's 2013 debt compares to other countries (Source: IMF World Economic Outlook):
*The WEO data for Poland starts in 1995.
** Latvia’s data ranges from 1999 to 2013 rather than
1995 to 2013. *The WEO data for Poland starts in 1995.
*** Ukrainian debt data fluctuates too much to be
significant in this analysis.
Compared to advanced economies such as Germany, the United States, France and outlandish Japan, Poland's debt ratio is in a very good position. Compared to post-soviet countries, Poland's debt ratio is higher, yet it is not catastrophic. However, when looking at the evolution of the debt between 1995 and 2013, Poland ranks very well in third place of this group behind Estonia and Canada. Put another way, the Polish national debt is under better control than in the United Kingdom, Germany, France, the United States and Japan.
What will happen to the Polish national debt?
When a family has a mortgage debt for a house, it doesn't ask itself whether it can pay back the debt today: it ponders whether it will be able to pay it back in the future. That's the exactly why they contracted a debt: they thought that paying interest on their mortgage while living in their house was worth the candle. Will the family be able to pay back its debt? If it keeps working jobs that pay at least as much as they did when they bought their house, they should do so without a problem.
The situation is similar for countries. Will Poland be able to pay its debt in the future? It needs inhabitants to be working and paying taxes in order to pay the debt back. For that to happen, it needs both people and a prosperous economic environment. Let's take a look at the demographic prospects of a few European countries (Source: Eurostat):
The situation is similar for countries. Will Poland be able to pay its debt in the future? It needs inhabitants to be working and paying taxes in order to pay the debt back. For that to happen, it needs both people and a prosperous economic environment. Let's take a look at the demographic prospects of a few European countries (Source: Eurostat):
Poland, like Germany, will see a decline in its population. Fertility is the main driver of population growth with migration being a less important one. The trends observed in the population projection are in line with the trends for projected fertility (Source: Eurostat):
The population of France, Sweden and the United Kingdom will grow while the population of Germany and Poland will decline. Consequently, even with a constant debt, the debt/GDP ratio will raise for Germany and Poland. Not good. For France, Sweden and the United Kingdom, debt could be in a situation where it raises yet its debt/GDP ratio lowers thanks to their high fertility rates.
As for the prosperous economic environment, Poland is in a good position where it catches up to advanced economies and benefits from a positive institutional environment as an EU member-State. Neither of those two characteristics are expected to change in the future.
As for the prosperous economic environment, Poland is in a good position where it catches up to advanced economies and benefits from a positive institutional environment as an EU member-State. Neither of those two characteristics are expected to change in the future.
Impact for Poland
Today, Poland has an important national debt, yet it compares favorably to the debt ratio of other countries and is not out of control. However, its fertility rate is among the lowest in Europe, endangering its future capacity to pay back the debt. To be serious about the prospect of the national debt repayment, Poland has to seriously get involved with fertility-stimulating programs. There are reasons why the Polish fertility rate is similar to the German one yet far below the French one. Fertility rates don't come out of nowhere: they stem from political and social choices. As of right now, the Polish fertility rate and its predicted rate are so low that the capacity to repay the national debt is hindered.
Back to the misleading billboard
Now, why would the billboard display the national debt in Polish zlotys as well as a "hidden debt" measure? Two scenarios are possible:
1) the billboard sponsor is willing to spend tens of thousands of Polish zlotys to display information on the public debt without caring to find out which debt data is most relevant in order to inform the general population;
2) the billboard sponsor has a political agenda.
The first scenario can be stricken out as it is unlikely. By displaying debt in a panic-prone format rather than in a nuanced manner, the message that gets carried across to those who aren't educated in the national debt topic (almost everyone) is that debt is running out of control. Consequently, given that the level of debt appears crushing, the only fiscally responsible thing to do is to put an end to irresponsible actions and pay off this overwhelming debt, which entails either shrinking the social state, privatizing government-owned assets or doing both.
However, the data reveals that the level of debt is not crushing. There are alternatives to privatizing or reducing the size of the state. One of those ways to deal with the Polish national debt is to stimulate the fertility rate using government resources. But that's not what the authors of the billboard on national debt really wish: either they are remarkably incompetent at communicating national debt data in a relevant fashion or they care more about a shrinking social state than the debt itself .
Note: the billboard also displays a "hidden debt". This might be the object of a later post, although the conclusion of that post would be the same one as the current post: the authors of the billboard have a political agenda.
Data appendix
General government debt from the World Economic Outlook (WEO) (General government gross debt as national currency).
Gross domestic product (GDP) from the World Economic Outlook (WEO). (current prices were used).
2013 debt/GDP ratio from the World Economic Outlook (WEO) (General government gross debt as percentage of GDP).
Population prospect: Eurostat, 1st January population by sex and 5-year age groups [proj_10c2150p]. Age: total; sex:total. Year range: 2010 to 2060. http://epp.eurostat.ec.europa.eu/
Fertility rate projection: Eurostat, Assumptions [proj_10c2150a]. INDIC_DE: Total fertility rate; Year range: 2010 to 2060. http://epp.eurostat.ec.europa.eu/
If you wonder why I used a 2010=100 basis for the population projection, see how little the data visually reveals in absolute levels:
Additional information
General government gross debt definition from the World Economic Outlook (WEO): "Gross debt consists of all liabilities that require payment or payments of interest and/or principal by the debtor to the creditor at a date or dates in the future. This includes debt liabilities in the form of SDRs, currency and deposits, debt securities, loans, insurance, pensions and standardized guarantee schemes, and other accounts payable. Thus, all liabilities in the GFSM 2001 system are debt, except for equity and investment fund shares and financial derivatives and employee stock options. Debt can be valued at current market, nominal, or face values (GFSM 2001, paragraph 7.110)."
General government net debt definition from the World Economic Outlook (WEO): "Net debt is calculated as gross debt minus financial assets corresponding to debt instruments. These financial assets are: monetary gold and SDRs, currency and deposits, debt securities, loans, insurance, pension, and standardized guarantee schemes, and other accounts receivable."
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