Following the United States and France, Britain became the third major developed economy to have its sovereign credit rating downgraded by Moody's. The other credit rating agencies are expected to follow suit.
Other than a blow to the nation's ego, the downgrade seems more symbolic than anything else. Despite being knocked down a notch from the top AAA rating, the US has hardly had any problem borrowing funds below real interest rates and there is no shortage of eager takers of its long-term government fixed interest securities.
Nobody seriously expects Britain's borrowing cost to go up significantly after the downgrade. British Chancellor George Osborne has remained defiant, vowing to "redouble" the government resolve to deliver its austerity economic plan, which calls for, among other things, cutting the deficit by a quarter.
But many British politicians, mainly those in the opposition, and economists believe that the downgrade was triggered by the government's austerity program, which is said to have further stunted growth at a time when the economic environment is clouded by what Moody's described as "the high risk of further shocks, economic, financial, or political within the (eurozone)". Osborne has said that Moody's move supported the government's tough austerity measures and was "a reality check for anyone who thinks Britain can duck confronting its debts".
It seems that the "move" has once again brought to the fore the issue that has pitted liberal economists against their conservative counterparts since the outbreak of the global financial crisis. Governments in most developed countries are torn between the choice of fiscal stimulants to spur growth and budgetary cutbacks to reduce deficits.
This is not a false choice as the experience of Hong Kong, one of the last bastions of free-market economy, shows. Hong Kong, of course, doesn't have a problem with debt. But that doesn't mean it can finance its entire capital expenditure with income from land sales and internal resources.
As a low-cost manufacturing base in the 1960s and 1970s, economic management was a simple matter of keeping the Hong Kong government small enough to avoid competing for limited financial and manpower resources with the private sector. When times were good, the government could afford to follow a relatively more expansive economic policy by boosting public expenditure on infrastructure projects. During an economic downturn, the government would invariably go into an austerity mode to allow the private sector to take full advantage of the plunging labor and finance costs to regain its competitiveness against other low-cost manufacturing bases.
But the rapid transformation to a service-based economy in the late 1970s brought the government around to the view that its ultra-conservative economic policy was behind the times and a new approach needed to be developed without turning its back on the free-market principle. The growing reliance on income from land sales to finance rising public expenditure is a subtle way of boosting the government's role in the economy without the need to raise taxes.
Income from land sales also gives the government the needed resources and credibility to underwrite expansionary fiscal policy to stimulate growth, which is needed to ease the pain of a protracted economic adjustment driven by brutal market forces. In the past, large-scale public spending was limited only to projects that could generate sufficient income to eventually pay for themselves.
The Mass Transit Railway is a case in point. Other than government capital, the project was financed mainly by bank loans. At the early stage, government guarantee was needed to secure those loans. Such guarantees were deemed unnecessary when lenders gained confidence in the capability of the railway system to earn sufficient operating profit to service its debt. They were right. The corporation that was established to build and operate the MTR went public some years ago and has been making profit since.
The building of the international airport at Chek Lap Kok, which began in the late 1980s as a centerpiece of the so-called Rose Garden project, was widely credited to have kick-started an economic boom that lasted till it was short-circuited by the outbreak of the Asian financial crisis in 1997.
To be sure, Hong Kong has its own set of problems. But it has demonstrated that spending public funds on large infrastructure projects that can help stimulate economic growth does not necessarily pile on public debt.
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