Debt, inequality and austerity

‘In most western countries, inequality is rising, and social mobility has stalled. Our citizens are losing purchasing power. They are struggling to find a decent job, to buy a proper house, to provide good education for their kids.

Meanwhile, the number of billionaires keep growing, and large multinational companies keep increasing their benefits… How can we ask our citizens with inflation a little longer, when some big companies pay zero taxes, thanks to the fiscal paradise, and the holes in the international regulations that we allow to exist?’ – An excerpt from the special address by Prime Minister (PM) of Spain, Pedro Sánchez, at World Economic Forum (WEF) 2023

The statement above indicates the deep extent to which inequality has risen over the years. Not only has the PM of a rich, advanced country like Spain made a strong comment on the ‘who’s who’ of the wealthy that gather annually at WEF in Davos, he has also emphasized the flawed neoliberal policy framework that keeps regulation toothless, whereby the rich get richer, and the lower-income groups bear the brunt of austerity policies that both raise the cost of living, and also do not allow reaching an inclusive, resilient, and sustainable green economy.

Globally, inequality has risen, especially since the start of the Covid pandemic, as pointed out by a recently released report ‘Survival of the richest: how we must tax the super-rich now to fight inequality’ by Oxfam. The revelations are indeed shocking, both in terms of significant increase in increase in inequality in the last decade for instance, but especially its explosion during the Covid pandemic where lack of progressive taxation and quite easily available space for the rich to avoid taxes have been some of the main reasons.

For instance, the Report gave an apt example to highlight the deep extent of the rot in the global financial architecture, by pointing out: ‘Elon Musk, one of the world’s richest men, paid a ‘true tax rate’ of just over 3% from 2014 to 2018.1 Aber Christine, a market trader in Northern Uganda who sells rice, flour and soya, makes $80 a month in profit. She pays a tax rate of 40%.’

Moreover, during the same time, there has been increase in absolute poverty, and a very difficult cost of living situation has come to the fore at the back of strong stagflationary headwinds, and while there has been over-emphasis on keeping a tight monetary policy stance, there has been little move on checking the lopsided tax policy that allows the rich to get richer at the cost of the most in global economy.

Highlighting the extent of inequality, and lack of progressive taxation, the Report pointed out: ‘Over the last 10 years, the richest 1% of humanity has captured more than half of all new global wealth. Since 2020, according to Oxfam analysis of Credit Suisse Data, this wealth grab by the super-rich has accelerated, and the richest 1% have captured almost two-thirds of all new wealth.

This is six times more than the bottom 90% of humanity. Since 2020, for every dollar of new global wealth gained by someone in the bottom 90%, one of the world’s billionaires has gained $1.7m. …The spectacular rise of wealth and income at the very top has coincided with a collapse in taxes on the richest 1%. While there are differences between countries, the general trend towards lower taxes for the rich has been remarkably similar across all regions of the world. …For every $1 raised in tax, only four cents comes from taxes on wealth.

The failure to tax wealth is most pronounced in low- and middle-income countries, where inequality is highest. Two-thirds of countries do not have any form of inheritance tax on wealth and assets passed to direct descendants.

Half of the world’s billionaires now live in countries with no such tax, meaning $5 trillion will be passed on tax-free to the next generation, a sum greater than the GDP of Africa. …Top rates of tax on income have become lower and less progressive, with the average tax rate on the richest falling from 58% in 1980 to 42% more recently in OECD [Organization for economic co-operation and development] countries. Across 100 countries, the average rate is even lower, at 31%. Rates of tax on capital gains – in most countries the most important source of income for the top 1% – are only 18% on average across more than 100 countries. Only three countries tax income from capital more than income from work.’

At the same time, the overall failure of the neoliberal mantra of ‘trickle down economics’ – taxing and regulating the rich less, and allowing them invest back into the economy – has meant that the brunt of fiscal consolidation has fallen lower income groups both in terms of higher indirect taxes – to cover the huge non-performance with regard to taxing the rich.

On the other hand, filling the fiscal, and current account deficits has led to disproportionate level of domestic and external debt, especially the exceedingly level of debt distress that many developing countries find themselves in since the start of the pandemic, given the extra welfare and vaccine purchasing needs on one hand, and lack of any meaningful level of debt relief, and special drawing rights (SDRs) provided by the IMF; in addition to lack of climate finance provided by rich, advanced countries.

Highlighting the precarious nature of debt situation for developing countries, and lack of multilateralism to reach an effective debt restructuring framework, even when the majority of debt portfolio of developing countries has seen increasing presence of money lent commercially, as compared to the proportion of debt from bilaterals/multilaterals, with the exception of China, Martin Wolf in his recent article ‘We must tackle the looming global debt crisis before it’s too late’ for the Financial Times (FT) pointed out: ‘But restructuring has become even more difficult than it was in the 1980s, after the Latin American debt crisis in 1982. …Just between 2000 and 2021, the share of public and publicly guaranteed external debt of low and lower-middle income countries (other than that held by IFIs) owed to bondholders jumped from 10 to 50 per cent, while the share owed to China rose from 1 to 15 per cent.

Meanwhile, the share held by the 22 predominantly western members of the Paris Club of official lenders fell from 55 to 18 per cent. …There exists no effective framework for bringing all these creditors together. Nor is there any credible template for restructuring that debt.’

Hence, while it is important to effectively and immediately adopt a meaningful progressive taxation system, and regulation that checks loopholes in the taxation system, especially for the super-rich, it is also important to bring in an appropriately creative debt restructuring framework.

One such creative recommendation, among a number of others that are needed, is to adopt a revised version of the ‘Brady bonds’ proposal. The same article points out in this regard: ‘Two well-known debt experts — Lee Buchheit and Adam Lerrick — have sent me a proposal aimed at doing what Brady bonds did in bringing the Latin American debt crisis to a halt, but in an updated manner. They suggest the offer to creditors of two bond exchange structures.

The entire stock of the government’s external bonds would be converted into an equal nominal amount of 25-40 year debt at a 3-3.5 per cent interest rate. The result should reduce the (currently unpayable) net present value of the debt by more than 50 per cent.’

In the same article, Martin Wolf indicated that following the ‘Brady bonds’ plan will in effect be a better bargain for the creditors than multiple debt restructuring paths taken at the micro level. He pointed out in this regard: ‘Why should creditors accept this? The answer is that the alternative would be a long drawn-out mess in which they are likely to get far less.

Meanwhile, IFIs could sort out the dire situation of so many clients at a predefined price. Someone would have to take this task on. In 1989 it was then US Treasury secretary Nicholas Brady. Now, who would be better than his successor, Janet Yellen?’

At the same time, it is also important to push back the neoliberal policy of unnecessarily stretching the limits of monetary tightening usage, given inflation is significantly an aggregate supply concern. This is because unwarranted levels of high interest rate only add to the debt distress of developing countries in terms of both domestic debt, and also external debt at the back of appreciated US dollar, and weak economic growth due to the practice of such austerity policies.

Copyright Business Recorder, 2023