While High Government Debt Levels Could Hasten Economic Recovery
Post Recession, There Are Many Long-Term Negative Consequences
Crowding Out Investment =» Lower Output & Income
~ A growing portion of people’s savings would be diverted to purchase government debt rather than toward investment in productive capital goods.
Higher Interest Payments = Higher Tax Rates & Lower Output & Income — Government may be forced to raise marginal tax rates and / or reduce spending on other programs to meet interest payments. e Reduced Ability to Borrow > Less Policy Flexibility — In case of economic downturns or international crises, government may not be able to raise substantially more debt. e Increased Chance of Sudden Fiscal Crisis Social / Economic Disruption
— Investors may lose confidence in government’s ability to repay debt & interest
without causing inflation.
(@E www.kpcb.com
Source: Congressional Budget Office, “Federal Debt and the Risk of a Fiscal Crisis.” 7/10.
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Lessons Learned: For Countries Burdened by High Debt Levels,
Austerity Measures are Necessary
208 Gross Debt Deficit as ° 2009-2010 Austerity Measures New Revenue Streams % of GDP as % of GDP
Greece
ti
Ireland
Spain
Portugal
(@ www.kpcb.com
14%
11%
11%
113%
66%
54%
e Wage freeze & bonus cut of 14% on all public sector employees
e Reduction in government contract workers
e 11% reduction in pensions & Increase in retirement age to 65 from 58
e 5-15% pay cut & 4% benefit reduction for all public sector employees
e $1.5B+ broad spending cuts in healthcare & infrastructure
e Hiring freeze for public sectors
e Increase of retirement age to 67 from 60
e Total budget cut of $70B 10-13E
e Joint IMF—EU bailout of $146B
e Tax increases for VAT (+2%) / fuel / alcohol / cigarette (+ 10%)
e Clamp down on tax evasion
e Carbon tax on fuel
e 1% tax rise on personal income about 120K euros
e Sold $7B in new bonds
9%
78%
e Wage freeze on all public sector employees
e Reduce state payroll via attrition
e 50% bonus tax on top bank executives
e Privatize state-owned industries
Source: Eurostat, European Commission, IMF, New York Times, Financial Times, BBC, Wall Street Journal.
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