Are governments always Over-Indebtedness and Fiscally Irresponsible?
Governmental debt and financial sustainability are pressing issues in all countries around the world. Many if not all subnational governments play an important role in delivering public services which helps to end poverty and promote economic development. Yet, current tension exists between policy experts encouraging harder budget constraints to control ostentatious subnational debt issuance, while trying to stimulate equitable and sustainable public financial mechanisms.
Public finance is the capital that makes governments run well, municipal bonds in particular grease the wheels to ensure public services are delivered at the local level by allowing project based support to build infrastructure. Unfortunately, many developing economies do not know how to develop management techniques that allow markets to function, especially at the subnational level. For example, Mexican state and municipal debt has increased in real terms over the past decade by 121.2 percent. The Mexican system is unique because it created public and private souses of capital to manage its funding (trust funds, commercial banks, a bond bank and the local bond market). Reaction by the government in 2016 was to create a fiscal discipline law which may supersede more stringent state government policies.
International financial institutions, such as IMF and the World Bank, have focused more on the financial sustainability of central governments than subnational governments. Nevertheless, we do not have a clear understanding on how to control or manage subnational government spending and debt in order to improve financial sustainability. For example, according to a study on public debt in OECD countries, fiscal decentralization has two faces: it causes excessive borrowing of subnational governments on the one hand, while improves fiscal stability of the public sector on the other. Often what happens is political maneuvering where national congress, like in the US, passes debt selling increases thus making finances unsustainable. These factors become more problematic during elections.
Other examples of unclear management include the United States. For example, Hillary Clinton’s 2016 campaign proposed to create a bond bank to resolve the diminishing transportation trust fund. The proposal used the United Kingdom’s model for supplying infrastructure finance throughout the country without including a bond board, which is necessary for oversight of such highly political decisions. Early consensus agreed that implementation in the United States could work, few if any, analyzed additional models of how this proposal could end up in elite capture, bureaucratic manipulation and corruption at the highest level.
Despite the growing attention of unsustainable municipal finances in places like China, Mexico and the Philippines few analyst, if any, have explored whether or what management factors may be important in determining the level of subnational government debt or how subnational governments should access foreign capital. Research to understand how the Chinese bond market, for example the largest subnational market in the world, is initiating. Managing important elements of the municipal bond market, such as political indicators of elections, accountability and participation, could determine which countries sink or swim in the upcoming decades.