The article (“Debt and exit”, March 8) on public debt refers to a recommendation of the 13th Finance Commission on placing a ceiling on public debt as a percentage of gross domestic product (GDP). Such a ceiling faces a practical difficulty in implementation given the data-related problem in getting the final figure of GDP, which is available long after the year is over. Any assurance that the advance quarterly estimates available during the year could be utilised for monitoring purposes is not likely to carry conviction.
In this connection, it is worthwhile to recall the experience of the US. In 1917, the Second Liberty Bond Act established the first statutory limit on federal debt at $11.5 billion. Since then, the ceiling has been going up with refinements in the definition of debt. Since 1941, Congress has voted more than 100 times to raise the ceiling, eventually to $12.04 trillion in December 2009. It was not the end of the story. On February 12, behind closed doors and with no cameras present, US President Barack Obama signed into law the Pay-As-You-Go Act of 2010, which increased the public debt limit further to $14.294 trillion. The Bill establishes a procedure requiring that new non-emergency legislation affecting tax revenue or mandatory spending should not increase the federal deficit; in other words, any new spending or tax cuts should be paid for with new taxes or spending cuts. It was an event missed by the Indian financial dailies. The ceiling is strict in the sense that the government cannot pay its bills, including salaries for its employees, if it exceeded the ceiling, as happened once during the Clinton administration.
The passing of debt ceiling legislation is relatively difficult in the US Congress. In our country, with the type of parliamentary democracy we have, the government can easily get an amending legislation approved. The ceiling, if at all to be imposed, could better be related as a percentage to the revenue receipts of one year prior to the previous year for which the actual figures are available. The exact percentage could be decided with a medium-term perspective on growth.
The pay-as-you-go procedure of the US could be followed, in which case there may not be any need for a separate target for revenue deficit as it often arises due to fresh expenditure commitments or tax cuts. The law should be justiciable unlike the Fiscal Responsibility and Budget Management Act.
A Seshan, on email
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