High debt, deficit not sustainable, central bank governor says
Debt sustainability has become a fashionable term, György Matolcsy, governor of the National Bank of Hungary (MNB), said in a Facebook post in reaction to an article in The Economist.
“In theory, a fiscal free lunch is possible. When the interest on government debt is lower than economic growth, existing debt has no fiscal cost. In the U.S., a deficit amounting to 2.1% of GDP can be managed infinitely as long as debt does not exceed 130% of GDP. But this cannot last forever,” Matolcsy said.
This option is only open to the U.S. as others have a number of unequal conditions, which means the free lunch is not available to other countries, he said.
The current high deficits and debts in Europe cannot be kept up, especially in the case of vulnerable emerging economies outside the euro area,
Matolcsy said in conclusion.
The last sentence in the article is especially interesting as Hungary is a vulnerable emerging economy outside the euro area with high debt. The MNB governor has repeatedly criticised the government’s budget policy in recent weeks for not decreasing the deficit and now recommends cutting deficit and debt to countries like Hungary, but the government is currently aiming to support economic growth instead.
Cover photo: Getty Images
