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When a government goes broke!

September 24th, 2018 | Tags: Dickson C. Igwe
Dickson C. Igwe. Photo: VINO/File
By Dickson C. Igwe

It is accepted that borrowing is the universal norm for governments to find the cash to operate. Public spending from taxes and borrowing are the way most western governments function.

However- and this is what the Virgin Islands Post Irma, must adopt- it is imperative that the borrowed cash is invested in capital that generates GDP growth and that drives economic productivity.

Cash that is borrowed, and not wisely invested, is wasted.

Then, and as a result of this waste, when the debt comes up for repayment and government is unable to meet their debt obligations, either a renegotiation of that debt occurs, or the government defaults.

Mismanagement of scarce resources is the core reason a government defaults on its debt.  

Repaying Debt 

This inability to meet the debt burden opens up a country to the diktat of agencies such as the World Bank, and International Monetary Fund that frequently demand austere type policies that cause national hardship.

Repaying the debt is the sole priority for these agencies.

The way that is done is through dramatic cuts in government spending.

Debt and interest repayment become the core financial focus of governments advised by the IMF and World Bank who loan the financially strapped government cash from global investors.

All other spending is secondary.

Layoffs and public spending cuts, lead to unemployment and poverty.

The tragedy of austere policies implemented when a government defaults on its debt is that a cycle of poverty is created.

Governments have to ‘toe the line’ drawn by external agencies.

This means that foreign investors and creditors represented by the IMF and World Bank are the top priority of national economic policy.

The man on the street is left to endure poverty and hardship, for decades in some instances.

On the other hand, wise spending from borrowing grows Gross Domestic Product.

For every cent wisely invested there is a greater return down the road.

Efficient social and physical infrastructure spending that is appropriate for the economic climate grows the GDP: sometimes steeply.

The economy is able to increase the income per capita which grows with GDP.

There is an increase in employment. Business and consumer confidence is at optimum. Government reduces the debt burden and is further able to spend on infrastructure which in turn increases solvency and monetary velocity.

Consumer demand increases as well as business activity and profitability.

Prosperity is driven by wise and transparent governance. The result is happiness in the land. 

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1 Response to “When a government goes broke!”

  • PPolitical Observer (PO) (24/09/2018, 19:30) Like (3) Dislike (0) Reply
    Good read. When a country’s government goes broke, ie, its debt load (expenditure) exceeds revenue, it has to priorities expenditures, cut expenses or increase revenues. A budget deficit occurs when expenses exceed revenues; budget deficit increases national debt. Often, countries borrow to make up budget deficits. Further, reducing expenses to meet top priorities, entails making both vertical and horizontal cuts to service delivery, cutting staff........etc.

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