debt

Online Course Unit 8

Government debt – a neglected theme of Catholic social teaching

Philip Booth, Kaetana Numa and Stephen Nakrosis ABOUT THE AUTHORS

debt

Introduction

In recent decades, a significant number of developed countries have accumulated high levels of government debt. Countries have always borrowed to fight wars or to finance profligate spending. However, the development of modern debt markets and instruments, together with post-war thinking in economics, has changed the nature of government borrowing and indebtedness.

Government borrowing effectively involves the transfer of the cost of government provision of goods, services and welfare payments to future generations. There may be situations in which this is justified. However, whether or not this is so, it is important that Catholic social thought and teaching engages with this issue. Over the centuries, there has been discussion of problems such as inflation amongst those exploring Catholic social thought. And, in recent years, the Catholic Church has become very involved with the question of government debt in less developed countries. Nevertheless, there has been relatively little discussion of government borrowing and indebtedness in developed countries. This is despite the fact that there have been occasions when the extent of debt has severely undermined democratic accountability and the ability of governments to undertake the key functions that are demanded of them in Catholic social teaching.

This section describes the evolution of government debt and some key questions that might be considered in the development of Catholic social thought and teaching on the subject.

The recent evolution of government debt

Public attention to government debt is often sparked during difficult economic times. This was the case in the early 1980s, when Latin American countries were unable to service their debt and stood on the brink of default. In 2009, the European sovereign debt crisis threatened the future of the euro zone, an episode from which it has not really recovered. Government debt has also been much discussed during the Covid crisis as there had been unprecedented public spending on furlough and business support. This has led many to question whether further increases in government debt are sustainable.

However, during better economic times problems with government debt do not disappear. In between crises, many countries have failed to reduce debt so that each new crisis leads it to grow to higher levels. Furthermore, what might be termed “implicit debt” in the form of future pensions and healthcare liabilities accumulates regardless of economic circumstances. Individual countries also go through phases of increasing debt dramatically, but this does not necessarily reach the headlines unless it is sufficiently widespread or sufficiently serious that there is a crisis. Perhaps in this way, as in other ways that will become clear in this section, there are similarities with environmental crises.

Table One shows historical public debt data in five countries: the United Kingdom, the United States, Japan, Greece, and Brazil.

As might be expected, debt tends to rise during war time. Indeed, the history of the UK national debt from 1700 to 2019 can, more or less, be explained by three wars and a financial crisis: debt increased dramatically after the Napoleonic Wars, the First and Second World Wars and the financial crisis of 2008. In peacetime, government debt levels tended to fall, though that did not happen after the financial crisis. However, in recent years for a number of countries, debt has either grown or not been reduced during peacetime.

Table One: Government debt as a share of GDP at market prices in 1800–2025 (in %)

1800 1820 1840 1860 1880 1900 1913 1920 1939 1950 1970 1990 2000 2010 2020 2025*
United Kingdom 176.8 260.0 154.7 115.5 65.4 32.4 27.9 137.8 149.7 216.9 73.2 28.8 37.0 75.7 108.0 117.0
United States 18.1 13.9 0.2 1.4 17.5 6.6 3.3 27.9 44.0 87.5 35.7 62.0 53.0 94.7 131.2 136.9
Japan 34.0 21.5 53.6 25.6 71.2 14.0 12.0 67.0 143.8 215.8 266.2 264.0
Greece 218.1 64.7 77.8 23.6*** 24.7 73.2 104.9 146.3 205.2 165.9
Brazil 99.0 54.9 37.7 36.2** 30.8 10.6 65.7 68.5 63.0 101.4 104.4

* projection.

Source: IMF Data Mapper: Historical Public Debt Database for 1800–2010, IMF Data Mapper: World
Economic Outlook, for 2020–2025).
** data for 1923. *** data for 1952.

In considering fluctuations in the national debt, we should also take into account defaults and inflation. These are ways of reducing government debt without repaying it “honestly”: and so, if debt falls for these reasons, it is, in fact, problematic. Default involves countries not paying the obligations demanded by debt contracts. Inflation leads to a country repaying debt in devalued money. In the UK, for example, the price level doubled between 1974 and 1979. Thus, in many ways, the fall in the debt to national income ratio in this period was illusory: governments were devaluing their debt using the mechanism of inflation and repaying the holders of government bonds with money that had a lower value. Japan defaulted on its debt following the Second World War and there were other defaults amongst the countries in the table.

Since 2009, Japan has been the first developed modern economy in a peaceful period to sustain a debt level above 200 per cent of GDP. Meanwhile, the Greek debt situation is probably synonymous with the debt crises in South and Central America with which we have become familiar. Although Greece managed to keep debt below 30 per cent of GDP for most of the post–war period until the 1980s, debt then rose rapidly, hovering around the 100 per cent mark from 1993, surging after the financial crisis and crossing the 200 per cent threshold. It is only as a result of bailouts, severe austerity, restructuring and intervention by outside economic agencies that the situation has been stabilised.

In the decade following the financial crisis, government debt did not return to pre-crisis levels: indeed, in many countries it rose further even after the worst of the crisis had past. Between 2007 and 2019, government debt as a share of national income doubled in the UK (from 42 per cent to 85 per cent IMF, 2020b), with similar trends displayed in the US (rising from 65 per cent to 109 per cent), Greece (from 103 per cent to 181 per cent), Japan (from 175 per cent to 238 per cent) and Brazil (from 64 per cent to 90 per cent). Even if we take the period 2014-2019, after the bailouts of banks at the height of the financial crisis, only in Germany did was government debt fall.

Whilst the snapshot and history of government debt may be a cause for concern, we should also consider the dynamics of government debt going forwards. In the UK, the Office for Budget Responsibility (OBR) projects government debt forwards for 50 years in their annual Fiscal Sustainability Report. They assume that tax and spending policies remain the same (that is, for example, that we continue to uprate pensions, tax brackets and healthcare spending in line with current policy). This demonstrates what may happen to the national debt as demographics change and, in the situation we are facing, have fewer taxpayers and more elderly people in receipt of pensions and healthcare. Even before the pandemic, government debt in the UK was forecast to reach 283 per cent of GDP by 2067 (Office for Budget Responsibility, 2018). When the 2020 Fiscal Sustainability Report was produced as the pandemic was just beginning, that figure was revised to around 400 per cent of national income (Office for Budget Responsibility, 2020). This figure fluctuates, but current projections are similar. To keep the debt under control, there will have to be huge cuts in government spending or increases in taxation over the next generation. Indeed, the OBR projections suggest that, even with large increases in taxation to levels a long way beyond those experienced in modern British history or in other developed countries, there would still have to be cuts in government services or transfer payments, including to those to whom promises of pensions or healthcare provision had been made. These developments in public finances are a consequence of the creation of social security systems whereby pensions and healthcare costs are financed by taxes from the following working generation. The implications of this will be discussed in later sections.

In any given year, the total amount of government debt increases if there is a budget deficit: that is, if annual government spending exceeds annual revenues. Italy, for example, has had deficits every year since the Second World War. There are various possible reasons for running deficits (to be discussed below), and it is often argued that short term budget deficits may be reasonable and justified if they are followed by periods of budget surplus. However, as can be seen in Figure One, over the last 25 years most of the countries used as examples in this section primarily ran budget deficits, with only fleeting periods of budget surplus (1999–2001 in the UK, 2000 in the US, and 2016–2019 in Greece).

General government surplus as a share of GDP (%) (negative figure is a deficit)

Figure One General government surplus as a share of GDP (%) (negative figure is a deficit)
Source: OECD (2021) General government debt

Government debt as a proportion of national income is often regarded as a better measure of the burden of government debt. This increases if the deficit in any year as a percentage of national income is greater than the growth in national income. This is a lower hurdle, but the increase in indebtedness as a proportion of national income in Table One shows that most countries have not been clearing it for any sustained period of time.

When government debt is accumulated, there is a genuine burden: it is not merely a paper transaction. Firstly, interest has to be paid. Secondly, governments have to reduce spending or increase taxation, all other things being equal, in order for the burden of debt to be brought back down to lower levels. Currently, government debt interest in the UK amounts to around nine times government spending on foreign aid and around twice the level spending on defence.

It is often suggested that government debt in developed countries is not a burden because “we owe it to ourselves”. This is not correct. Firstly, a substantial proportion (about one-third in the UK) is owed to overseas holders of government debt. Secondly, even if that is not the case, we do not owe it to ourselves: future taxpayers in general owe it to particular people such as those who expect to receive a pension from a pension fund which has bought government bonds. This is a real burden for future taxpayers and, if governments defaulted or repaid debt with worthless money resulting from inflation, those pensioners in the future would not receive the pensions they expect.

As noted above, the Catholic Church has become interested in government debt as it relates to poorer countries which have either been indebted to richer countries. There has also been some discussion of government debt in middle-income countries. The national debt of Mexico was 48 per cent of national income when the country threatened to default on its debt in 1982. This brought the attention of the Catholic Church and numerous non-governmental organisations to the worsening debt situation in Latin American and African countries. By 1986, when the Pontifical Commission for Justice and Peace released a document ‘At the Service of the Human Community: An Ethical Approach to the International Debt Question’, Mexico’s debt had risen to 78 per cent of national income. This level is much lower than debt levels in many richer countries today. However, it still sparked a crisis. Even though debt levels in richer countries have not reached levels at which default is being threatened or feared imminent, many of the problems we discuss below, such as inter-generational justice, are even more serious in the case of today’s developed countries. A country does not have to be faced with imminent disaster for its debt to be ethically problematic.

Future pensions and healthcare costs

Official government debt is not the only obligation that a government has. A feature of Western countries in the post war period is that they have established social insurance systems whereby individuals accumulate rights to pension and healthcare but, unlike in the private sector, no money is set aside to meet these costs. Not only that, also unlike in the private sector, governments do not have to account for these obligations. These systems can remain stable if the population structure does not change. However, if the number of young people falls relative to the number of older people, they can become a serious burden. Some countries (for example, Japan, Germany, Italy and most Central and Eastern European countries) are facing rapid population ageing. In such circumstances, the obligations increase, but the means to finance them will deplete.

These pensions and healthcare obligations are sometimes termed “implicit government debt” as they remain hidden from public view and scrutiny. Longer life expectancy and more retirees is, of course, a welcome development. However, it poses a problem for government finances because no funding has been set aside to pay for future pension and healthcare commitments. The nature of this form of debt can easily be illustrated by policy decisions that were taken in a number of countries in the early 2000s. In countries such as Argentina, Poland and Hungary, individuals had their invested pension funds confiscated by the government which used the funds to repay government debt thus making the debt look smaller. However, the government then made pension promises to those who had their funds taken away to replace the privately invested pensions. In most private-sector contexts, this would be called an “off-balance-sheet” liability and would have to be accounted for. In these cases, it was not.

The amount of implicit debt is not simple to quantify, not least because it depends on assumptions regarding future policy decisions. One estimate placed total US debt at 500 per cent of national income in 2014 – about five times the level of explicit debt (Tanner, 2015). Estimates do vary from country to country and depending on the method used to calculate the obligations. However, this estimate is quite close to the consensus across a range of countries[1].

It could be argued that governments do not have to honour those commitments, and implicit debt could be reduced by simply changing entitlements. However, this would be like another form of debt default and offend distributive justice given the reasonable expectations of those who have made contributions to state pension schemes during their working lives.

It is worth mentioning that the Catholic former Prime Minister of Ireland, John Bruton, explicitly raised the issue of government debt in a lecture he gave in April 2019. He noted: “Too often the Church takes the easy route and leaves that particular moral question to politicians…The Church should apply to fiscal policy the same sense of inter-generational justice that it applies to environmental policy”. Bruton specifically related this to “piling up unpayable pension obligations”.[2]

The causes and financing of government debt

No comment has yet been made about the causes of government debt except in passing. However, as we move on to consider the moral implications, we do need to consider why governments accumulate debt. This does help determine its moral salience. These questions of government debt management are discussed in standard public finance textbooks such as Gruber (2019). The issues relating to the incentives of democracies to have a natural bias towards voting for governments that accumulate more debt are examined in Wagner (2012). The arguments can be very technical, but the basic principles are those outlined below.

As noted above, debt is often accumulated in wartime. A just war is likely to involve protecting the common good of the country (or an allied country) from being gravely imperilled. All the resources of a country might be procured to fight the war. This could involve stopping normal economic activity with the costs being met by the government. In addition, the war itself, including enemy action, might prevent normal economic activity taking place and cause a great deal of damage to infrastructure.

A situation similar to wartime might be when there is a major catastrophic event such as a natural disaster, financial crisis or pandemic. In both these situations, the government may wish to borrow to provide support so that people can maintain an adequate standard of living – this has happened in many countries during the Covid pandemic. Government tax receipts will be lower and there may be direct costs to meet too (testing people in the case of the pandemic, reconstruction following an earthquake and bank rescue in the case of a financial crisis). As we have noted above, in the UK, government debt peaks have been closely related to wartime, the financial crisis and, the next peak is likely to be coincident with the pandemic.

A second reason why government debt might be accumulated is that a government may simply be unwilling to raise the taxes to finance its spending. In simple terms, electorates in a democracy may demand more government spending than they will pay in taxes. The moral implications might differ somewhat where governments borrow to invest in ways that will benefit future generations – for example by investing in transport facilities. These investments might be expected to increase economic growth in future years and, perhaps, increase tax revenues as a result.

A further reason for borrowing, at least in the short term, arises because economies can go through periods of below and above average growth. When growth is below average, unemployment might also increase, profits decrease and businesses go bankrupt. When this happens, tax receipts will tend to fall and government spending on welfare payments may rise. As a result, the government may have a deficit. When growth is above average, the opposite may happen. Tax receipts may increase, government spending fall and a surplus might be generated. Rather as in the case of a household with fluctuating income, it does not make sense for the government to run a balanced budget in each individual year when its revenue and spending commitments are varying. On average, deficits arising from this effect should cancel out surpluses.

Related to this, governments often run deficits in order to try to “stimulate” the economy when output or employment are below normal levels. This would typically be described as a “Keynesian” policy and whether it has any beneficial effect is widely disputed. In theory, governments would run surpluses to “cool” the economy when output or employment are above normal levels.

This section is discussing government debt in developed countries. In such countries, governments tend to finance their debt by selling bonds. However, government spending can also be paid for through the creation of money or, more commonly, especially since the financial crisis, by the central bank printing money in order to buy the bonds that governments have issued. This can lead to inflation. Indeed, governments printing money to finance spending has been a common cause of hyper-inflation in countries such as Zimbabwe and Venezuela.

It is easy for governments, with the support of electorate, to have a natural bias towards accumulating debt rather than surpluses. As such, governments may run deficits when unemployment is high but not reduce them when the economy returns to normal. It may be easier for governments to spend money on infrastructure projects, even if the return is mediocre, than restrain spending, and so on. Spending without taxing allows some part of the electorate to benefit, at least in the short term, with costs being postponed to a future date. The same applies to the accumulation of implicit debts in relation to pensions and healthcare. It is easier for governments to make promises to the current workforce that they will receive pensions and healthcare in the future and not set aside the capital to finance such payments than it is to set up a fund of capital. Future generations then bear the cost.

The reasons why governments accumulate debt do matter when it comes to the moral aspects, especially in relation to distributive justice. We now move on to discuss those moral questions that are legitimately within the domain of Catholic social thought and teaching.

Inter-generational justice and government debt

Though government debt is widely discussed in economics and, to a lesser degree in other social sciences, with questions of fairness and justice being raised, it has not been discussed within Catholic social teaching documents or, for that matter, in learned discourse on Catholic social thought.

Humanity was placed at the pinnacle of Creation by God and given the responsibility to act as stewards of the earth. As it says in Genesis, God told Adam and Eve to “Be fruitful and multiply; fill the Earth and subdue it.” (Genesis 1:28). The principle by which the goods of this world are there for all persons to enjoy is known in Catholic teaching as the “universal destination of goods”. It is impossible for everybody to enjoy all the goods of the world. Prudently, the Church, and governments which follow the teaching of the Church even if only implicitly, employ certain principles of distributive justice to ensure that the goods of this world are distributed peacefully and fairly. These principles will involve freedom of contract in labour markets, private property, intervention by civil society organisations where freedom of contract produces unsatisfactory results and redistribution of resources to those in serious need including by governments. These are processes in which all institutions within society, including the family, are involved.

Government indebtedness involves decisions being taken for taxpayers in one generation to consume today at the expense of future taxpayers.[3] The question is whether this is compatible with reasonable principles of distributive justice. In these matters, the exercise of prudence is important. So the answer will not be a straightforward “yes” or “no”: reasonable people will disagree. However, in principle, we cannot ignore future generations when it comes to distributive justice. Pope Paul VI wrote:

We are the heirs of earlier generations, and we reap benefits from the efforts of our contemporaries: We are under obligation to all men. Therefore, we cannot disregard the welfare of those who will come after us, to increase the human family. The reality of human solidarity brings us not only benefits but obligations. (Populorum progressio, 17)

And Pope Benedict XVI warned we are “living in untruth” when we live at the expense of future generations (Seewald, 2010, p. 47-48): Pope Benedict was answering a question about government debt by Seewald when he made the comment. In Catholic social thought, our responsibility for the future has been recognised in terms of environmental obligations. We are compelled to “recognize our grave duty to hand the earth on to future generations in such a condition that they too can worthily inhabit it and continue to cultivate it.” (Caritas in veritate, 50) But little has been said about government debt.

Perhaps the first occasion on which inter-generational justice was considered systematically in Catholic social teaching was in Laudato si, Pope Francis’s encyclical on the environment. A section of this encyclical was titled “Justice between the generations”. This section called for solidarity between the generations. Solidarity can be defined as the ‘firm and persevering determination to commit oneself to the common good’[4]. Pope Francis wrote: “What kind of world do we want to leave to those who come after us, to children who are now growing up? This question not only concerns the environment in isolation; the issue cannot be approached piecemeal.” (160) He went on to warn against a culture of instant gratification and a culture in which parents consumed too much making it more difficult for their children to acquire a home or build the resources for starting a family.

The same principles apply to government debt. A society which is comfortable with accumulating more government debt because it is unwilling to raise in taxation from the current generation the resources necessary to fund government consumption spending is imposing an unjust burden on future generations of taxpayers as well as living in a manner that is inappropriate. If debt becomes too onerous, governments might renege on repaying debt. This too would be an injustice to those who, in good faith, have lent money to the government. It might be though that we should have little sympathy with creditors in such situation. But we should remember that we cannot generalise about their financial situation. They may include beneficiaries of pension funds who rely on those funds for their income in retirement or other groups of people who are not necessarily well off, both at home and overseas.[5]

If the government tries to reduce its debt burden through inflation, this will create other problems (see below) but also lead to an arbitrary redistribution of wealth from people with certain types of property (those on fixed incomes, often pensioners as well as holders of government debt) to the wider body of taxpayers and to other debtors in the economy. This, itself, is problematic from the perspective of distributive justice.

The principles of distributive justice that are normally employed in Catholic thought should make us very concerned about one generation consuming, systematically, at the expense of future generation of taxpayers except in specific circumstances which will be considered below. We would argue that this conclusion should also apply to the obligations in respect of future pensions and healthcare costs too. A generation should not vote itself entitlements without putting aside the necessary resources to provide for the future costs of those entitlements as would happen in a private sector or mutual social insurance arrangement. To do so puts society at great risk of future economic and demographic change leading to a situation where the resources may not exist to fund the obligations. This, in turn, has the potential to create tension and conflict between the generations whereas proper principles of justice should remove instances of tension and conflict. Such conflict also undermines the common good and so the principle of social justice is undermined as well as the principle of distributive justice.[6]

This does not mean, of course, that we should not have systems of healthcare and pension provision in old age. We would argue that such provision should largely be funded at the time the promises are made. This can happen in the context of mutual arrangements for workers sometimes organised by trades unions, commercial private arrangements or government arrangements[7] or there can be hybrid arrangements which mix these approaches.

However, there might be situations in which it is both prudent and just for a state to take on debt. A society which incurs debt to create conditions which lead to economic prosperity for both the current and future generations can rightly expect that future generations contribute to the cost of creating those conditions. This might be the case, for example, when the government funds infrastructure investment, though prudence is required to ensure that such infrastructure spending will have the expected benefits and will not simply promote the interests of specific interests in society. Secondly, when a catastrophe hits, such as the current pandemic, and it is prudent for the government to bear the economic costs of both treatment and actions that might be taken to prohibit economic activity, it is just for the costs to be spread over future generations, though it could also be argued that governments should accumulate resources to deal with such events rather than borrow when they happen. Also, in the event of the common good of the whole community coming under threat of destruction in war time, it would be just to borrow to defend the country if necessary. Firstly, future generations will benefit from the action, if it is a just war. Secondly, when such action is necessary for the survival of society, just as the normal principles of property rights can be over-ridden for the benefit of a destitute person[8], Catholic social teaching would surely accept that we should do all we can to protect the common good of society in times of war even if future generations bear part of the cost.

This section can only scratch the surface of the subject and perhaps lay some of the groundwork for those who follow in this area. However, we would argue that, applying the principles of distributive justice, there is a strong case for governments not to systematically accumulate debt unless the circumstances are exceptional or future generations clearly benefit. As well as being an injustice, the remaining sections consider whether such indebtedness might, in fact, prevent governments from undertaking the functions which Catholic social teaching demands of them.

The role of government in Catholic social teaching

The Catechism of the Catholic Church states (Catholic Church, 1994): “every human community needs an authority to govern it” and that the authority’s role is “to ensure as far a possible the common good of society” (1898). The common good, in turn, is defined, in Gaudium et spes, one of the documents of the Second Vatican Council, as: “the sum of those conditions of the social life whereby men, families and associations more adequately and readily may attain their own perfection.” (74)

All organisations in society have their own responsibility in promoting the common good. And it is not the role of the state to directly require people to live a life of fulfilment and perfection. Instead, it should create the conditions whereby it is possible for all to play their part in bringing this about. It is in this context that Catholic social teaching has outlined specific functions of the state, including promoting justice, ensuring internal and external peace, protecting property rights, ensuring stable money and appropriately regulating economic life. The state should also act in accordance with what has become known as the preferential option for the poor, paying particular attention to the wellbeing of the least well off (see, for example, Rerum novarum, 37) because those who are richer have the means to look after their own interests. According to Hirschfeld (2018, page 27), the government, in Thomistic thinking, should promote the cultivation of virtue – certainly it should not impede it.

The Catholic Church has supported democracy as the means of choosing the government (Centesimus annus, 46). This ensures that the government is accountable to the people and can be replaced peacefully. Democracy should also be a means of ensuring that society is not run by narrow interest groups.

The question arises, therefore, of whether the accumulation of government debt impairs these crucial functions of government or, indeed, the workings of democracy. In response to this question, it can be said that there are many historical examples of where debt leads to serious problems within a country that prevent governments or democracies fulfilling their legitimate functions. The examples suffice to make the point. Just because every case of excessive debt does not lead to a catastrophic outcome does not mean we should dismiss the problem.

Debt and the impairment of governance for the common good

The accumulation of too much debt and the subsequent need to pay interest and principal on that debt has, in the past, seen governments constrained in the performance of their necessary functions. In several cases, the accumulation of debt has led to or exacerbated a total breakdown in the functioning of government and society. In the most extreme cases, the problem of too much debt resulted in the sovereign ceasing to exist. For some nations, the accumulation of debt led to a loss of control over domestic commodities and assets.

During the 19th century, as trade began to spread, and as the newly independent nations of the world in places such as South America and Africa sought to use borrowed money for internal development, a wave of debt crises and defaults hit the globe. During the decade of the 1860s, Egypt borrowed extensively to build roads and factories as well as to erect public and private buildings in Cairo in imitation of western capitals, especially Paris. The country was forced to default in 1876, with the result that its public finances were put under the control of a joint French-British debt administration council. The UK then invaded Egypt in 1887, ostensibly to force the repayment of foreign debt. However, the UK’s action may also have been motivated by concern over control of the Suez Canal, with the debt issue serving as causus belli for aggressive action against Egypt.

During the same period, many nations, including Tunisia, Serbia and Greece, were forced to accept foreign debt administration councils taking control of government revenue streams to ensure their obligations were paid. Haiti, Nicaragua and the Dominican Republic were forced to accept US troops on their soil in the early years of the 20th century and permitted US officials to take control of customs houses so that revenue could be directed to the repayment of foreign debt.

The fall of the Bourbon dynasty in France was accelerated by that regime’s financial woes. During the final days of Louis XVI’s reign, he was forced to call a meeting of the Estates General in an effort to convince lawmakers to raise taxes. Once assembled for the first time in 150 years, the Estates General sought to wrest more power from the king, leading to the start of the French Revolution.

Debt has also been used by nations as a means to pressure a borrower to either pursue or cease national policies of which the lender disapproves. One such example took place during the Suez Crisis of 1956. When General Gamal Abdel Nasser announced that Egypt would nationalise the Suez Canal, the UK and France, following Israel’s invasion of Egypt in October, sent troops to occupy the Suez Canal Zone. US President Dwight Eisenhower, fearful that this display of military force could push Egypt into a closer relationship with the Soviet Union, used political and economic pressure to force the invading nations to withdraw their troops from Egypt. The US was in a position to make such demands due to the large amounts of UK and French debt it held which had been issued to pay for wartime expenditure and subsequent rebuilding. The 1956 Suez Crisis serves as an example of how a creditor nation can exert pressure on those nations indebted to it.

In the most extreme cases, a nation dealing with the problem of too much debt can find itself in such dire straits that it will lose its independence and be subsumed into another nation. At the end of the 17th century, such an occurrence took place in Scotland. A scheme to colonise the Isthmus of Panama, under the auspices of the Darien Company, ended in complete failure. The plan essentially bankrupted Scotland and, shortly thereafter, Scotland entered into a political union with England under the Treaty of Union of 1707. While the financial fallout from the Darien scheme was not the only cause of that political union (Scotland was also suffering from famine following a series of poor harvests) the subsequent collapse of Scotland’s ability to pay its debts or finance its necessary functions resulted in a loss of the nation’s independence.

Similarly, in the 1930s, the financial situation in Newfoundland, at the time an independent country, resulted in the nation ultimately becoming part of Canada. The 1920s saw Newfoundland engage in deficit spending and borrowing from abroad. When the world economy contracted after the stock market collapse of 1929, Newfoundland’s financial situation became perilous. In 1932, Newfoundland was forced to seek a loan from the UK and Canada to enable it to service its debt. The country gutted its civil service, closed post offices and eliminated many social assistance programmes. The collapse of its economy led to a collapse of Newfoundland’s political system. The nation eventually gave up its popular sovereignty and gave control of the island’s government to a commission which was appointed by and responsible to Westminster. After the end of the Second World War, still faced with a large debt burden, the people of Newfoundland voted to accept confederation with Canada.

The more recent history of Argentina is especially interesting because it illustrates many of the points made in this section. As a country, it has defaulted on its debt on nine occasions. At the beginning of the 1930s, Argentina was one of the richest countries in the world. During the Peronist period of the 1950s, although state spending increased dramatically, this did not lead to the build-up of government debt, partly because of the exceptionally good fiscal position following the Second World War, but also partly because of the printing of money to finance government spending. However, government spending in excess of revenues eventually led inflation to rise to over 1,000 per cent in 1976. After that point, a huge excess of government spending over tax revenues began to be financed by external debt which rose by around 40 percentage points of national income in ten years. This compounded and was compounded by other macro-economic difficulties and inflation rose again to around 1,500 per cent in the mid-1980s. Inflation at these levels is deeply damaging to the social and economic fabric and leads to arbitrary redistribution of income and wealth as well as encouraging financial speculation. During this period private investment and real incomes slumped.

In the following 20 years, there was a series of events which can be linked to economic and social dislocation. There were debt defaults, high levels of inflation, reductions in government spending on social programmes, a near tripling of extreme poverty in 18 months from May 2001, riots and a general election in which 20 per cent of the population spoilt their ballot papers. In addition, policy autonomy (and thus the accountability of the government to the people) was lost as the International Monetary Fund (IMF) and creditors had a much greater say in taking political and economic decisions. Almost every legitimate function of government was seriously impaired.

The euro crisis of 2009 saw similar problems in many southern European countries. This crisis came, to some extent, out of the blue. However, the already high levels of government debt in countries such as Italy and Greece meant that they were unable to deal with the consequences of a shock which, if earlier policy had been more prudent, would have caused much less difficulty. Both Italy and Greece went into the euro crisis with government debt over 100 per cent of national income. In Italy, a government entirely made up of non-elected professionals was appointed during the debt crisis. In Greece, the response to the debt crisis involved a range of debt support packages by other countries and institutions. These packages have a real cost to the creditors and, because of this, conditions are imposed, so that democratic accountability is, in effect, lost and replaced by accountability to institutions representing creditors such as the European Union and the IMF. Extreme poverty in Greece doubled in the five years following the crisis to some of the highest levels in the EU.

An extreme case of social dislocation caused by government debt arose in the case of inter-war Germany. It is important to note that this debt did not arise as a result of German taxpayers being unwilling to fund government spending through taxes: it was imposed on the country by the allies following the First World War. Nevertheless, it is the effects of indebtedness that are of interest, not the cause. The immediate effect of the high levels of debt was default and then French and Belgian occupation of the Ruhr valley. The subsequent printing of money to pay debts and finance transfers to those affected by the occupation then led to hyper-inflation and immense poverty and economic and social damage.

In the above cases, there were a number of factors at work and there is disagreement about ultimate causes of the various crises that have arisen. However, there is no doubt that the growth of government debt has been an important factor in the undermining of the key functions of government outlined in Catholic social teaching. The accountability of government to the people through democracy has been undermined. In addition, in the various examples, we have seen hyper-inflation, a huge growth in poverty, an increase in social tensions, military takeovers and riots. The basic functions of government in promoting the common good have been seriously impaired.  In addition, there are also important concerns related to the government’s role in promoting distributive justice. Each of default, inflation and extreme austerity lead to an arbitrary redistribution of wealth and incomes between different groups in society. Some of those groups might be able to manage the loss of incomes and wealth; others on fixed incomes or receiving pensions invested in government bonds may lose everything they own or much of their income. The same may happen to the very poorest who rely on state assistance, All citizens may face significant increases in taxes and therefore a reduced ability to play their part in promoting the common good through thriving business or family life.

Virtue in government and concluding thoughts

Following the financial crash, there has been much discussion of the importance of business ethics. The application of the virtues in government is also essential if the government is to promote the common good and distributive justice. In concluding this section, it is helpful to relate the problem of government debt to the practice of the virtues in government. Pontifical Council for Justice and Peace (2005, 565-574) explains the moral challenges facing governments and their electorates and these questions have been raised in a number of papal encyclicals, including, most recently, in Fratelli tutti.

The practice of the virtue of justice can become very difficult in situations where there is significant government debt, the accumulation of which might be regarded as an injustice in itself. Decisions may have to be taken to increase the tax burden beyond reasonable levels, to inflate away debt or to impose arbitrary costs on some groups who may be vulnerable. Alternatively, government may choose to default on debt or reduce vital social support programmes. All of these may undermine principles of distributive justice, but the government may be in a position whereby some or all of these actions are necessary as we have seen.

Prudent judgement, whereby those who are governing soberly make difficult judgements using the information that is available, also become much more difficult when there are competing interests trying to avoid the costs of government debt.

A lack of the virtue of temperance may well have been responsible for the building up of deb t in the first place. Once the debt reaches high levels, this virtue becomes more difficult to exercise both by government and by the electorate. There will be a temptation to pursue strategies which are attractive in the short term but which ultimately may be destructive. Such actions might include the creation of inflation or, indeed, the support for authoritarian or nationalistic political parties which try to lay the blame at the door of foreign creditors.

Finally, it should be said that the virtue of courage becomes that much more necessary in highly indebted countries. Dealing with the extremely difficult situations that arise when a country has to move from a situation in which it is spending more than it is willing to pay in taxes to one in which taxation is higher than government spending requires courage. This is true, both on the part of the electorate which could choose to continue to postpone the problem, and also on behalf of politicians who will be tempted to respond to such demands.

Ultimately, it could be said that government debt creates an occasion of sin in which virtuous behaviour becomes difficult. Indeed, government debt could be regarded as part of a structure of sin. As is discussed by Breen (2008), it is the teaching of the Catholic Church, through John Paul II, that structures of sin are ultimately the result of personal choice. It is certainly true that government debt is ultimately the result of personal choice, though, as we have noted, it may be the correct choice in some circumstances. Such structures of sin can then create conditions in political and economic life which cloud moral judgement and make virtuous behaviour more difficult. This is certainly the experience of highly indebted countries, even if many have come through the experience without the breakdown of civil society or democratic politics. The current position of many highly indebted governments suggests that those countries will face considerable challenges which will require the exercise of the virtues by governments and the electorate if there is not to be serious social dislocation and a threat to the common good in future decades. In many cases, this build-up of debt and future social insurance liabilities can be regarded as having undermined distributive justice, especially across the generations. It may also lead to governments being unable to fulfil their essential functions as demanded by Catholic social teaching.

References

Booth P. M. and Petersen M. (2020), Catholic Social Teaching and Hayek’s Critique of Social Justice, Logos: A Journal of Catholic Thought and Culture, 23(1), 36-64.

Breen J. M. (2008), John Paul II, The Structures of Sin and the Limits of the Law, St. Louis University Law Review, 52, 333-335.

Catholic Church (1994), Catechism of the Catholic Church, London: Geoffrey Chapman.

Gokhale, J. (2014), The Government Debt Iceberg, Research Monograph 68, London:Institute of Economic Affairs.

Gruber J. (2019), Public Finance and Public Policy 6th edition, New York:Worth.

Hirschfeld M. L. (2018), Aquinas and the Market – toward a humane economy, Cambridge:Havard University Press

OBR (2018), Fiscal Sustainability Report – July 2018, London:Office for Budget Responsibility.

OBR (2020), Fiscal Sustainability Report – July 2020, London:Office for Budget Responsibility.

Pontifical Council for Justice and Peace (2005), Compendium of the Social Doctrine of the Church, London: Burns & Oates.

Seewald P. (2010), Light of the World – the Pope, the Church and the signs of the times, San Francisco:Ignatius Press.

Tanner M. (2015), Going for Broke: deficits, debt, and the entitlement crisis, Washington DC:The Cato Institute.

Wagner R. E. (2012), Deficits, Debt and Democracy, Cheltenham:Edward Elgar. 

Papal encyclicals and other Church documents referred to in this section

Francis, 2020, Fratelli tutti, encyclical letter:

http://www.vatican.va/content/francesco/en/encyclicals/documents/papa-francesco_20201003_enciclica-fratelli-tutti.html

Francis, 2015, Laudato si, encyclical letter :

https://www.vatican.va/content/francesco/en/encyclicals/documents/papa-francesco_20150524_enciclica-laudato-si.html

Benedict XVI, 2009, Caritas in veritate, encyclical letter:

https://www.vatican.va/content/benedict-xvi/en/encyclicals/documents/hf_ben-xvi_enc_20090629_caritas-in-veritate.html

John Paul II, 1991, Centesimus annus, encyclical letter:

https://www.vatican.va/content/john-paul-ii/en/encyclicals/documents/hf_jp-ii_enc_01051991_centesimus-annus.html

John Paul II, 1987, Sollicitudo rei socialis, encyclical letter:

https://www.vatican.va/content/john-paul-ii/en/encyclicals/documents/hf_jp-ii_enc_30121987_sollicitudo-rei-socialis.html

Pontifical Council for Justice and Peace, 1986, At the Service of the Human Community: An Ethical Approach to the International Debt Question:

http://www.iustitiaetpax.va/content/giustiziaepace/en/archivio/documenti/at-the-service-of-the-human-community–an-ethical-approach-to-th.html

Paul VI, 1967, Populorum progressio, encyclical letter:

http://www.vatican.va/content/paul-vi/en/encyclicals/documents/hf_p-vi_enc_26031967_populorum.html

Vatican II, Gaudium et spes, 1965, Pastoral Constitution on the Church in the World,

https://www.vatican.va/archive/hist_councils/ii_vatican_council/documents/vat-ii_const_19651207_gaudium-et-spes_en.html

Leo XIII, 1891, Rerum novarum, encyclical letter:

http://www.vatican.va/content/leo-xiii/en/encyclicals/documents/hf_l-xiii_enc_15051891_rerum-novarum.html

Questions for discussion

How do excessive levels of government debt relate to Catholic principles of distributive justice?

How can excessive levels of government debt undermine the efforts of government to promote the common good?

What virtues are necessary for the management of government fiscal policy, and which virtues are particular important when debt levels have become excessive?

In what ways are government debt crises and demographic decline linked?

If a government owes large sums of money to a government or international organisation, to what extent should it allow the creditor to control economic policy? Does allowing creditors to influence economic policy in such as situation impair or promote the common good?

Footnotes

[1] See also Gokhale (2014) for a thorough discussion of this question.

[2] See: https://www.youtube.com/watch?v=JqARepLm888 at approximately 29 minutes.

[3] It is the holders of government bonds who will reap the corresponding benefit, whilst they sacrifice current consumption in order to lend to the government.

[4] Sollicitudo rei socialis 38.

[5] In the UK, about 40 per cent of all government debt is held by UK insurance companies and pension funds. See: https://dmo.gov.uk/media/17379/oct-dec.pdf

[6] See Booth and Petersen (2020) for a discussion of the distinction between these two types of justice.

[7] In the UK, for example, local government pensions are funded and the funds invested, but national government civil service pensions and general old-age pensions are not funded from investment. Both are paid by the state from tax revenues and notional pension contributions.

[8] See Rerum novarum 14. This situation was also discussed by St. Thomas Aquinas.

About the authors

Philip Booth is Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He is also Director of Catholic Mission at St. Mary’s University and is Director of Policy and Research at the Catholic Bishops’ Conference of England and Wales. He has previously held positions at the University of Buckingham, the Institute of Economic Affairs, Cass Business School and the Bank of England. He is Adjunct Professor in the School of Law, University of Notre Dame, Australia. Philip is a Fellow of the Royal Statistical Society and a Fellow of the Institute of Actuaries.

Kaetana Numa is a Research Fellow at the Centre for the Study of Governance and Society at the Department of Political Economy at King’s College London, where she completed her PhD in Political Economy in 2021. Prior to her PhD research, she worked at think tank in Lithuania for almost a decade. Kaetana graduated with a BA in Economics and International Relations (Cum Laude) from Tufts University, and also holds an MA in Religious Studies from Vilnius University.

Stephen Nakrosis is a journalist from New Jersey and a PhD candidate at St. Mary’s University, Twickenham. He has written about Catholic Social Teaching and hagiography for a number of publications. He is currently employed by a major financial newswire based in New York City.

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