What is the scale of the decline in the cost of servicing public debt generated by sustained high inflation over the long term? In what relations of the level of debt of the system of state finances, the budget deficit in the central budget of the state, the level of the rate of economic growth, the level of investment, consumption, unemployment, inflation, interest rates does the state benefit from high inflation to reduce the cost of servicing public debt in the context of the high level of debt of the system of state finances?
Thanks to high inflation, tax revenues increase in the central state budget, the main element of the state's public finances. Research centres independent of the government estimate that, thanks to high inflation in recent quarters, around PLN 5 billion has additionally flowed into the state budget. As the indebtedness of the public finance system has increased dramatically over the past few years and, in addition, during the SARS-CoV-2 (Covid-19) coronavirus pandemic, the government has injected over PLN 200 billion of additional, printed money into the economy, so the risk of indebtedness of the public finance system is growing. In the situation of a deepening downturn in Br 2023, the scale of the debt of the state's public finance system could still increase significantly. In such a situation, rating agencies operating through investment banks could significantly lower the solvency and creditworthiness ratings of public finances, which would result in an increase in the investment risk of funds invested in Treasury bonds and it would be necessary to increase the interest rate of these securities sold to foreign investors. This would significantly increase the cost of rolling over successive series of issued treasury bonds and increase the cost of servicing the debt of the state's public finance system, the cost of servicing public debt. For the government, it is better to keep inflation high, because this way the scale of the increase in the cost of servicing the public debt is smaller. Unfortunately, this comes at the expense of the rapidly declining purchasing power of the money available to citizens and economic agents. From mid-2022 onwards, the wage increases that employers are implementing for employees in companies, enterprises and institutions no longer compensate in full for the rapidly declining purchasing power of money due to high inflation. This whole process, which began with the use of so-called Anti-Crisis Shields during the SARS-CoV-2 (Covid-19) coronavirus pandemic, is the result of Poland's short-sighted and chaotic economic policy. These Anti-Crisis Shields consisted of non-refundable financial subsidies for the majority of economic entities operating in the country in the form of government subsidies to salaries of employees working mainly in commercially operating companies and enterprises and other forms of financial support aimed at limiting the scale of growth of unemployment during large-scale lockdowns imposed in Poland on selected sectors of the economy and national quarantines introduced during as many as three consecutive waves of the SARS-CoV-2 (Covid-19) coronavirus pandemic from March 2020 to early 2021. The procedure of imposing the Shields on operators in certain economic sectors during the ongoing investigations in many countries was considered questionably legitimate as so-called 'anti-pandemic safety instruments', i.e. slowing down the development of coronavirus infections. The main effect of the aforementioned Anti-Crisis Shields was an increase in inflation already from the beginning of 2021, followed by an increase in interest rates by the central bank in Poland, i.e. the National Bank of Poland, between October 2021 and September 2022. This resulted in a significant increase in loan instalments paid by borrowers to commercial banks and a decrease in the creditworthiness of new borrowers. Then, from as early as the beginning of 2022, economic growth began to decline rapidly, inflation continued to rise, investment levels began to fall and by the end of 2022 the beginning of a decline in consumption was noticeable. From mid-2022 onwards, housing developers have been reducing investment levels in the construction and delivery of new houses and flats. Accordingly, the chaotically short-sighted economic policy pursued, in which the pandemic crisis of 2020 was exacerbated by lockdowns imposed on selected, mainly service sectors of the economy, and the so-called Crisis Shield programmes applied, triggered an increase in inflation and an even more serious and economically realistic deepening of the downturn in 2022 and 2023. In addition, the applied restriction (solar energy, biofuel-based energy) and inhibition (wind energy in 2016) of the development of renewable and emission-free energy sources caused a significant decrease in the energy security of the domestic energy sector resulting in an extremely acute energy crisis of 2022, highly costly for citizens. In view of the above, the chaotic short-sighted economic policy conducted by the increasing level of state interventionism carried out by the government over the past 8 years, including the increasing level of government control of certain sectors of the economy, the increasing scale of the application of the so-called "Anti-Crisis Shield", the increasing scale of the introduction of additional, printed money into the economy without coverage led to the formation of even greater crises. As the next parliamentary elections are due to be held in autumn this year 2023, which the PIS political option in power for the last eight years plans to win, so further programmes of non-refundable subsidies for selected types of enterprises continue to be applied, which becomes another pro-inflationary factor. However, high inflation for the government apparently is the least of all problems, because thanks to high inflation, as I wrote above, tax revenues to the state budget are higher and thus the cost of servicing the high public debt is lower.
In view of the above, I address the following question to the esteemed community of scientists and researchers:
What is the magnitude of the decrease in the cost of servicing the public debt generated by sustained high inflation over the long term? In what relations of the level of debt of the system of state finances, the budget deficit in the central budget of the state, the level of the rate of economic growth, the level of investment, consumption, unemployment, inflation, interest rates does the state benefit from high inflation to reduce the cost of servicing public debt in the context of the high level of debt of the system of state finances?
And what is your opinion on this?
What is your opinion on this subject?
Please respond,
I invite you all to discuss,
Thank you very much,
Best regards,
Dariusz Prokopowicz
High inflation may appear to decrease the burden of public debt in nominal terms, as the government can repay its debt with cheaper money. However, in reality, the decrease in public debt servicing costs generated by high inflation depends on various factors, such as the structure of the debt, the type of inflation, and the response of the monetary policy.
In general, if the debt is mostly held domestically, and the inflation is unanticipated, the decrease in public debt servicing costs may be significant in the short term. In this case, the government can pay back the debt with money that has lower purchasing power, effectively reducing the real value of the debt.
However, if the debt is mostly held by foreign investors, or if the inflation is anticipated, the decrease in public debt servicing costs may be limited or even negative. In this case, investors may demand higher interest rates to compensate for the inflation risk, which would increase the cost of borrowing for the government.
Moreover, if the inflation is persistent and leads to higher nominal interest rates, the government may have to pay higher interest payments on its outstanding debt, offsetting the benefits of inflation.
Therefore, it is difficult to provide a specific magnitude of the decrease in public debt servicing costs generated by high inflation, as it depends on various factors and is subject to uncertainty.
@Dariusz Prokopowicz
I tend to agree with Lazaro ATHANAS Mwonge . In particular, if public debt is in foreign hard currency and purchasing power parity holds, home currency depreciation will erase any inflation benefit. This said, I suspect accelerating inflation is welcome by most governments, as long as taxes increase in proportion of nominal GDP and government expenses (wages, debt) follows with a longtime gap. In the long term, high and accelerating inflation isn't sustainable unless your objective is to join Argentina, South Africa or Venezuela.
I will just add two aspects.
One is seigniorage. the profit made by a government by printing currency. This is a nominal debt emmited at 0% interest rate, which real value drops with inflation. The less dollarized the economy and the higher the monetary balance held by the public, the higher the inflation tax perceived by the government (equal to the loss in purchasing power of households' savings in cash). Obviously, with high inflation, demand for domestic money will drop.
Second, higher interest rates will be reflected in debt services based on the maturity of the papers and the need to roll over. When estimating the maturity, the median is the right statistics to be used. It is wrong to use the average, as it may give a false sense of security if a small portion of the public debt has a very long maturity: the mean is much more influenced by extreme value than the median and may strongly underestimate the amount of public debt the Treasury will have to roll over at higher interest rate in the short term.
Cheers.
It sounds like you are describing a situation where high inflation is benefiting the government by increasing tax revenues and reducing the real burden of its debt. However, this benefit comes at the expense of declining purchasing power for citizens and economic agents. Additionally, the increasing indebtedness of the public finance system and the injection of printed money into the economy raise concerns about the risk of a debt crisis and a potential downgrade in the solvency and creditworthiness ratings of public finances. This could lead to higher interest rates on Treasury bonds and increase the cost of servicing the debt.
It is important for the government to balance the benefits and costs of high inflation and consider the potential consequences of its economic policies. While the Anti-Crisis Shields may have helped limit the growth of unemployment during the pandemic, it is important to consider the long-term effects of such policies on the economy and the public finance system. A more sustainable approach to managing the economy and public finances may be necessary to address these concerns and ensure long-term economic stability.
It seems like you are presenting a scenario where a short-sighted and chaotic economic policy pursued by the government has resulted in an increase in inflation and a deepening downturn in 2022 and 2023. The increase in inflation has led to an increase in tax revenues for the state budget, which in turn reduces the cost of servicing the high public debt. However, this comes at the expense of rapidly declining purchasing power for citizens and economic agents, and a decrease in creditworthiness for new borrowers. Additionally, the applied restriction and inhibition of the development of renewable and emission-free energy sources has caused a significant decrease in the energy security of the domestic energy sector, resulting in an acute energy crisis in 2022. The government's increasing level of interventionism, control of certain sectors of the economy, and the increasing scale of the application of the so-called "Anti-Crisis Shield" programs without coverage has led to even greater crises. As the next parliamentary elections are due to be held in autumn 2023, the government continues to apply further programs of non-refundable subsidies for selected types of enterprises, which becomes another pro-inflationary factor.
Sustained high inflation can result in a decline in the cost of servicing public debt over the long term. This is because as inflation increases, the nominal value of the debt decreases in real terms, making it easier for the government to repay its debt. However, this benefit comes at a cost, as high inflation can lead to a decline in purchasing power and economic growth, which can result in lower tax revenues and higher levels of unemployment.
The level of debt of the system of state finances, the budget deficit in the central budget of the state, the rate of economic growth, the level of investment, consumption, unemployment, inflation, and interest rates are all factors that can impact the extent to which the state benefits from high inflation to reduce the cost of servicing public debt. A high level of debt and budget deficits can make it more difficult for the government to repay its debt, while a low rate of economic growth, low levels of investment and consumption, and high levels of unemployment can lead to lower tax revenues and higher levels of public debt.
Inflation, on the other hand, can lead to higher tax revenues and reduce the real value of the debt, making it easier for the government to service its debt. However, high inflation can also lead to a decline in the value of the currency, which can make it more expensive for the government to borrow in the future. Overall, sustained high inflation can be a double-edged sword for the government, with benefits and costs that need to be carefully weighed.
High inflation can reduce the real value of public debt, making it easier for governments to service their debt. The decline in the cost of servicing public debt generated by sustained high inflation over the long term can be significant, but it also depends on the specific circumstances of each country. In general, high inflation can benefit the state by reducing the real burden of its debt in relation to the size of its economy. However, this benefit must be weighed against the potential costs of high inflation, such as reduced investment, lower economic growth, and increased uncertainty and instability.
The relationship between the level of debt of the system of state finances, the budget deficit, economic growth, investment, consumption, unemployment, inflation, and interest rates is complex and varies across different countries and economic conditions. In general, a high level of debt combined with a high budget deficit and low economic growth can increase the risk of a debt crisis, which may lead to higher interest rates and lower investment. However, in some cases, high inflation can help reduce the real cost of debt servicing, especially if the government is able to maintain low unemployment and encourage investment and consumption. In such cases, high inflation can be a useful tool for reducing the burden of debt, but it should be used carefully and with consideration of its potential costs and consequences.
Increasing the current annual inflation target regime from 2 percent to 3 percent inflation reduces debt while lowering GDP. Higher inflation reduces the real value of the government’s outstanding debt while increasing the tax burden on capital investment due to a lack of inflation indexing.
https://www.imf.org/en/Blogs/Articles/2023/04/03/fiscal-policy-can-help-tame-inflation-and-protect-the-most-vulnerable