Home Letters Debt ceiling should not be confused with debt
There has been some alarm raised about the stated intent to increase the country’s debt ceiling, much of it sounding as criticisms one would expect with the incurrence of debt. The two are not the same – debt is a liability whereas a debt ceiling is the capacity to incur debt. Further, debt for some is inherently dangerous and by this, large levels should be avoided. But that is conditional as debt can be very beneficial when well managed and used for generating income and development.
Since debt is the consumption of future income, its value, or lack thereof, is determined by the future-income position of the debtor. That position is beneficial when the present worth/value (PV) of the stream of incomes from the employment of the debt is greater than the debt itself. It is wasteful when those charged with its liquidation, are no better off than without the debt. So, a student who uses debt to acquire a skill, which marginal returns in PV terms exceed that of the debt, benefits from the debt. The same for a worker who uses debt to acquire a vehicle for transportation purposes when the PV the avoided costs from alternative means of transportation exceed the debt. This rationale is not limited to households but has application to business investments and public infrastructure.
Much debt worldwide is poorly managed and incurred for short-term objectives. One example is for the boosting of Gross Domestic Product (GDP), an economic index of progress and wellbeing. The encouragement of the consumption of household commodities, along with unfunded tax cuts and stimulus packages by Governments are often used for this purpose. This practice has become so egregious, that for many developed countries, their entire growth in GDP is funded by debt, not by productive assets, but by their societies living beyond their means. The resulting impact is for future GDPs of these countries to sharply decline. Fortunately, this is not the case in Guyana as it is basically a cash society and its population is not saturated with the means of facilitating debt such as credit cards.
Another economic wellbeing-index is the ratio of public debt to GDP, or how many years of productive activity it would take to liquidate this debt. In the USA, for example, the 2020 ratio of public debt to GDP was 127.3. Debt exceeds the annual productive capacity of the country. But the USA 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 comparative ratio is 56.3, which level is considered by many financial organisations as easily manageable, an indication that debt here is not a problem.
And finally, Guyana’s oil and gas revenues will provide it with the means for rapid development. The revenue flows are time-dependent, and the only way to speed up this development is through debt.
So, Guyana’s public debt ceiling should not be confused with public debt. The public debt ceiling will allow the country to raise debt which when properly managed and used to acquire assets and infrastructure for development in telecommunications, transportation, education, clean energy and health care sectors, can be most valuable in improving the living standards for all Guyanese.