Tag Archives: Government debt

The reversed psychology of public debt and austerity

Austerity programs have failed consistently during history yet we are using them as an argument to “fix” our crisis. One may argue that austerity shrinks the economy and therefore debt to GDP is even more difficult to reduce if GDP is falling. This becomes more and more clear as we look at the estimates for public debt of some of the austerity countries. Here are some figures published by CEEMEA in their latest Global Business Outlook:

The idea behind austerity is that reduced budget deficit levels will “instill confidence” into the markets but it seems that by undermining growth and destroying consumer confidence it achieves the exact opposite.


Reforming the public sector in a crisis: Göran Persson’s views on the Swedish Great Depression and crisis opportunities

NYC: National Debt Clock
Image by wallyg via Flickr

In the early 1990s, Sweden suffered its deepest recession since the Great Depression. Although the Swedish crisis was homegrown, its causes and effects resemble the events unfolding in the world today. After years of strong domestic growth driven by easy credit and high leverage, a real-estate bubble burst, leading to the collapse and partial nationalization of the banking sector. Domestic demand plunged as the household savings ratio soared by 13%. In three years, public debt doubled, unemployment tripled, and the government budget deficit increased tenfold, to more than 10% of GDP, the largest in any OECD country at the time.

Göran Persson was appointed finance minister after the 1994 elections, and became prime minister two years later. In order to regain the confidence of international lenders (and so pave the way for stability and sustainable growth) he knew that Sweden had to reduce its budget deficit dramatically. It took four years for the Swedish government to balance its budget. By 2006 the country had almost halved its public debt.

Persson recently spoke about what it takes to improve the way the public sector works and here are some of the lessons learned that he shared with McKinsey Quarterly:

  • First, as Persson says, you must make it clear that you are responsible for the process and that you are prepared to put your position at stake.
  • Second, the consolidation program must be designed so that the burdens are shared fairly. Public support for tough policies would quickly deteriorate if they were not perceived as fair.
  • Third, the consolidation program has to be designed as a comprehensive package: by presenting the measures together, it becomes clear to all interest groups that they are not the only ones being asked to make sacrifices. Also, by starting with the most difficult measures, you demonstrate your resolve and increase the chances of achieving the early results, which will be important for getting the continued support that is critical for sustaining the effort.
  • Transparency is the fourth lesson: never play down the effects of the program’s measures, be completely honest when you communicate with financial markets, clarify assumptions and calculations.

When talking about crisis opportunities, Persson admitted that the cuts in government consumption became a driver of improved efficiency, since public authorities were forced to do the same job on unchanged or reduced budgets and he mentions three of the strategies pursued:

1) One strategy aiming to improve productivity, service quality, and freedom of choice involved the liberalization of telecommunications, mail, railways, and other infrastructure industries. It also involved allowing privately run providers to compete with public ones in providing tax-financed services for the school system, health care, child care, and care for the elderly.

2) Another measure was to introduce information technology to broad layers of the population through a tax-deduction scheme that allowed workers to obtain a home computer under a favorable leasing agreement with their employers. The penetration of IT in Sweden during these years outpaced every other country in the world, which made it possible for authorities like the Tax Agency to go online at an early stage. More and more of the communication between Swedish public agencies and citizens now takes place on the Web, and many Swedes do their annual tax submissions over the Internet, allowing for a very efficient processing of taxes.

3) A third strategy was to give people with basic schooling the chance to complete a secondary education that would qualify them for university studies. More than 10% of the workforce seized this opportunity between 1997 and 2002. When the business cycle turned up again, they became a very good resource on the labor market, not least in the public sector. This education scheme served a dual purpose: it eased the pain of unemployment and increased Sweden’s long-term competitiveness by lifting the average competence level of the workforce.

Göran Persson also commented on his experience with trying to get the civil servants on board and making them partners in the initiative, changes in the way government worked and the way it developed and delivered its services, and influencing change at ministries that were not making good on their efficiency targets.