Establishing a National Debt Clock:
A Day Late, and a Dollar Short
China Times editorial (Taipei, Taiwan, ROC)
November 2, 2010
Next year the Republic of China will celebrate its centennial. Government debt will reach record highs. In view of the rapid deterioration in the government's finances, the Ministry of Finance intends to set up a "national debt clock" to keep the public informed. The biggest problem however is that our government's definition of government bonds is not consistent with international standards. Information disclosure is incomplete. Government debt is nearly off the charts. But only now is the government establishing a national debt clock. It is, to borrow an old expression, a day late and a dollar short.
Over the past decade, central government debt has doubled. The Ministry of Finance wants to establish a national debt clock. A prerequisite however is complete data. Only that will enable any national debt clock to serve as an early warning system. If any would-be national debt clock presents incomplete information, the Ministry of Finance can assure the public that the "Republic of China's finances are the soundest in the world." Such a national debt clock would create only confusion. It would only be suspected of misleading the public.
The international definition of government bonds includes bonds less than one year old plus non-operating fund subordinated debt. Our government regulates debt in accordance with the "Public Debt Act." Take 2009 for example. Debts less than one year old amounted to 240 billion NT. Non-operating fund debt amounted to 570 billion NT. Therefore 2009 central government debt amounted to 4.95 trillion NT. This exceeds the officially declared amount by 810 billion NT. Therefore according to the International Monetary Fund (IMF) definition, the 2012 central government debt burden is on the verge of bankruptcy.
The Control Yuan has already reprimanded the government for failing to define existing government bonds in accordance with international standards. But if the Ministry of Finance's future national debt clock still uses such relaxed standards and incomplete information, what sort of warning can such a national debt clock really provide?
The government debt burden also includes future "hidden liabilities." The total budget for 2012 has revealed for the first time "hidden debt" amounting to 13.3 trillion NT. This includes pensions for military personnel, civil servants, public sector teachers, and social security (public health insurance, labor health insurance, farm worker health insurance). These are legally-mandated government debt burdens. But they are not defined as such by the Public Debt Act. Thirteen trillion NT in "hidden debt" will have to be honored. If one day the government is unable to pay people their pensions, social unrest will surely ensue.
Recent strikes in France are a harsh example. Despite continuing street protests, the French National Assembly voted on October 27 to approve a retirement system reform bill. It changed the statutory retirement age from 60 to 62, and the full pension qualification age from 65 to 67. French President Nicolas Sarkozy insisted on retirement system reform. The government could no longer make its pension payments. France faces a huge wave of postwar baby boom generation retirees. Unless the nation's retirement system is reformed, it will eventually become unsustainable.
Following the financial crisis, Europe and the United States faced financial difficulties. This, coupled with a rapidly aging population, made their financial problems worse. According to Standard & Poor's, if their policies are not changed, French government spending on the elderly would amount to 29% in 20 years, the highest in Europe and America. In the nearby UK, government spending on the elderly would amount to 20% in 20 years. An aging population has caused a huge budget deficit. Forty years later, the government debt-GDP ratio for the Group of Seven will exceed 400%. The amazing estimates show that the United States and Europe have reached the point where fiscal reform is unavoidable. Last month the UK announced its most drastic fiscal tightening policy since WWII. It includes changing the statutory retirement age to 62.
In recent years, the population on Taiwan has aged rapidly relative to its European and American counterparts. According to CEPD estimates, by 2015, the elderly will outnumber the young. By 2025, the elderly will amount to 20% of the population. Society on Taiwan will become ultra-elderly. By then, pensions, health care, long-term care, and other major health care spending will amount to a heavy financial burden. Coincidentally, the the Bureau of Labor Insurance assessment pointed out that in 2026, the Labor Insurance Fund will face bankruptcy. By then, it will require government subsidies. Without sound finances, people really should begin worrying that they may not receive pensions upon retirement.
Government debt is rapidly rising. The population is rapidly aging. Our national debt has already sounded an alarm. Will establishing a national debt clock inhibit growing debt? Consider the United States. During the financial tsunami the U.S. national debt exceeded the 10 trillion US mark. Its national debt clock broke too. Decision makers must keep an eye on the public treasury. They must not continue indulging in feel good policies. Otherwise, no matter how many national debt clocks they establish, they will find it difficult to turn back the tide. Debt clock or no debt clock, Europe and America's painful experience should provide our government's financial agencies a hard-earned lesson.