Those who can’t lead, borrow. The American, Chinese and Indian governments boast of the strength of their economies, yet they are also borrowing intensely. Such a situation is not only contradictory, it will also prove harmful to their chances at global leadership in the future. A strong economy means government should spend less and not need to borrow at all. In all three countries, policymakers appear oblivious to the consequences of failure on this score. Will the US or China lead in coming decades? When will India become a global challenger? The answers may be neither and never. Instead the world could see a slow slide into a long stagnation.
Few people consider India a truly global actor but, within the next 20 years, it will have both the world’s largest population and largest labour force. It will be difficult in 2040 for the global economy to be healthy if the Indian economy is not. There is obviously a long way to go before then, and India is not going in the right direction. The government of Narendra Modi, prime minister, is obsessed with the title of “fastest-growing major economy” and insists India will reclaim that spot in 2018 or 2019.
Yet central government borrowing will rise this year as a share of GDP, from an already excessive figure. The core of the higher deficit is a jump in the simple revenue shortfall, which overwhelms one-time accounting tricks used by politicians everywhere to dress up ugly budgets. In addition, Indian states borrow even more intensively than the national government.
A country growing rapidly with a young workforce should not need to do this. More important, a poor country which seeks at least a full generation of such growth should not borrow against that future. India is showing neither the vision nor will to become an economic leader.
Many would claim China already is such a leader. It qualifies in terms of size and no shortage of people tout its performance. They acknowledge that Chinese GDP growth, for instance, has slowed by half in the past 10 years, but point out this is natural as the size of GDP expands.
What is not natural is China’s bad track record on debt: according to the Bank of International Settlements, every measure of debt — consumer, government and corporate — has risen as a share of GDP for the past decade. China went from a low-leverage country in 2007 to having a worse debt position than the US in 2017, despite the fact that the US itself has borrowed heavily.
The bulk of Chinese debt is corporate, not explicitly government. But the bulk of corporate debt has been incurred by state-owned enterprises and underwritten by central and local government, as these firms borrow almost entirely from state-owned banks. It is thus China’s central government which has authorised a decade-long explosion in debt accumulation, even while trying to convince the world it offers a superior model of development.
Those who favour US global leadership can be reassured by China’s poor choices. But America’s own choices are disturbing. The US already faces enormous spending obligations in the form of entitlement programmes. Combined national government spending on healthcare hit $1tn in 2015 and social security spending is projected to hit an additional $1tn this year.
The 2017 federal budget deficit was $650bn and expected to rise over time as the country ages. Now, enter the tax cut. Congress and the administration had reason to cut corporate tax rates, but they did so by $1.5tn and with no offsetting tax increase elsewhere. The recent spending bill adds $300bn to that.
The federal deficit could thus reach $1tn in 2018 and, if not this year, then next. This is not happening during a crisis like the one in 2008. While there are problems with labour force participation and inequality, unemployment is 4.1 per cent and the US economy added $7tn in wealth over the most recent 12 months. Yet national debt is set to soar.
US federal borrowing has no justification. If China is telling the truth about its economy, it has no excuse for its corporate debt. If India wants a bright future, it cannot mortgage it now. No country has ever prospered from heavy government borrowing when times are good. Yet this is what the world’s economic leaders have to offer. They are walking into quicksand and could drag everyone else with them.