Does an economy need to borrow for growth?

And is it necessary to think that we are living better until a point when we will have to pay the price for it?! Looking back at economic history, the problem is not in the answer to the question itself, but in how it will be read and what lesson it will leave, because, just as there is no shared responsibility, the price of thinking that there is will be heavy for us – loss of freedom.

To the extent that the indebtedness of an economy is the result of the implementation of a certain fiscal and monetary policy, one of the major disputes in economic theory remains related to the extent of state intervention and its role in generating economic growth. Can the state be a good manager, and the interventionist policies it conducts a prerequisite for increasing the welfare of society?! Or should the government and the bureaucratic apparatus instead withdraw their influence on the economic activity of market agents and let the private sector be the main driver of economic growth?

An economy does not need to go into debt to achieve high economic growth. The effect is short-term and does not lead to the desired positive results in the long term. According to the principles of the Keynesian theoretical concept, one of the ways in which the state can influence growth is by using the instruments of fiscal policy. The familiar scenario, let's increase government spending on purchasing goods and services and stimulate consumption, seems as easy as it is uninteresting, and even a dangerous exercise. Economics, however, is not just a science of goods and services, but of the human action of individuals. Karl Menger, considered the founder of the Austrian School, sees it as a science of individual choice. Who, if not the individual himself, knows what is good and what is not for him, when he needs to consume and when to save, or why look for opportunities in a certain activity when he could see a better alternative for him in some other?!

Valuing freedom is like believing in yourself, your choices and your goals. Knowing that if you fall, it is because you jumped yourself, but nevertheless you take risks, take responsibility and learn something new about yourself. In a free market, the lack of security is a driving mechanism for continuous improvement and improvement of the standard of living, while for the state it is mainly a means of mass manipulation and ever greater regulation. The more people are inclined to transfer responsibility for making one or another decision to the state, the more power it has over the inefficient spending of public funds. Excessive deficit and public debt, accumulated in order to stimulate aggregate demand and expected consumption, lead to artificial prosperity and distortion of basic economic processes, a gradual loss of competitiveness, innovation, trust among society.

Every government faces the temptation to prioritize financing its current expenses, but the more influence it has on economic activity, the more likely it is to enter the negative spiral of a budget deficit. The paths to cover it go from raising borrowed funds to using fiscal buffers, and why not to more privatization of state assets. The monetary policy of the US Federal Reserve is another example of how the state can influence the economy and finance its deficit. In principle, a low interest rate is an important indicator for business, as it signals when there are enough savings in the banking system that consumers can use in future periods, and when it is the right time for entrepreneurs to borrow profitably and invest in future production. The problem is that lowering interest rates does not always happen naturally. Banks may also have sufficient liquid resources as a result of low-interest loans received from the central bank, for example. Such interventions do not support the economy, but the illusion that there is more capital available for investment than there is, i.e. consumers do not actually save, but consume, and for investors the wrong signal turns out to be the wrong investment. This is how state intervention can lead to overinvestment and overindebtedness, and instead of economic growth, a cathartic crisis can occur.

And because an action can always have a positive, negative or no result, it was clearly seen that only those economies that manage to make structural reforms, not deficits, to create an environment, not shackles for entrepreneurship, embark on the path to growth. The difference in the indicators of Estonia and Portugal is obvious. Countries that maintain low public debt progress faster compared to those in which budget expenditures traditionally exceed budget revenues. While in Estonia reforms were made, followed by growth, in Portugal debts were accumulated until that critical moment when the only solution remained salvation or bankruptcy. So, is it necessary then to think that we live better until that moment when we will have to pay the price for it?

Sources:

1. Who is to blame for the crisis? The response of the Austrian school of economics, IC "Siela";
2. The Free market and Its Enemies: Pseudo-Science, Socialism and Inflation - Ludwig von Mises
3. http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode=teina225
4. http://epp.eurostat.ec.europa.eu/tgm/refreshTableAction.do?tab=table&plugin=1&pcode=tec00115&language=en;
5. http://epp.eurostat.ec.europa.eu/tgm/refreshTableAction.do?tab=table&plugin=1&pcode=teina200&language=en

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