Debt ceiling should not be confused with debt

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Dear Editor,

The declared intention to raise the country’s debt ceiling has raised concerns, with most sounding like criticism one would expect with debt. The two are not the same – debt is a liability whereas a debt ceiling is the ability to incur debt. In addition, the indebtedness of some is inherently dangerous and therefore high levels should be avoided. But this is conditional because debt can be very beneficial when it is well managed and used to generate income and promote development.

Since debt is the consumption of future income, its value, or lack thereof, is determined by the future income position of the debtor. This position is advantageous when the present value (PV) of the revenue stream from the use of the debt is greater than the debt itself. It is wasteful when those responsible for its liquidation are no better off than without the debt. Thus, a student who uses debt to acquire a skill, whose marginal return in terms of PV exceeds that of debt, benefits from debt. The same applies to a worker who goes into debt to acquire a vehicle for transport purposes when the PV of the costs avoided thanks to the alternative means of transport exceeds the debt. This logic is not limited to households but applies to business investment and public infrastructure.

Much of the world’s debt is mismanaged and incurred for short-term purposes. An example is the increase in gross domestic product (GDP), an economic index of progress and well-being. Encouragement of consumption of household goods, as well as tax cuts and non-government funded stimulus packages are often used for this purpose. This practice has become so blatant that for many developed countries all of their GDP growth is financed by debt, not by productive assets, but by their societies living beyond their means. The resulting impact is a sharp decline in the future GDPs of these countries. Fortunately, this is not the case in Guyana because it is essentially a monetary society and its population is not saturated with means of debt relief such as credit cards.

Another index of economic well-being is the ratio of public debt to GDP, or the number of years of productive activity it would take to pay off that debt. In the United States, for example, the ratio of public debt to GDP in 2020 was 127.3. The debt exceeds the country’s annual production capacity. But the United States is by far not the worst. Japan’s public debt ratio for 2020 was 266.18, and closer to home, Barbados has a ratio of 134.09. Guyana’s comparative ratio is 56.3, a level considered by many financial organizations to be easily manageable, a sign that debt here is not a problem.

Finally, Guyana’s oil and gas revenues will give it the means for rapid development. Income streams depend on time and the only way to accelerate this development is through debt.

The Guyanese public debt ceiling should therefore not be confused with the public debt. The public debt ceiling will allow the country to increase debt which, when properly managed and used to acquire assets and infrastructure for development in the sectors of telecommunications, transport, education, clean energy and health care, can be very useful in improving the standard of living of all Guyanese. .

Faithfully,

Louis Holder

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