By Robert Parenteau
Editor’s note: This idea was recently endorsed by Wolfgang Munchau in the Financial Times as a means of sustaining fiscal expenditure despite the present standoff in Greek negotiations with the economic group formerly known as the Troika. The use of tax anticipation notes as Greek local scrip to give Greece greater fiscal space was last mentioned on this site by the author of this essay in December 2013.
The recent election of an explicitly anti-austerity party in Greece has upset the prevailing policy consensus in the eurozone, and raised a number of issues that have remained ignored or suppressed in policy circles. Expansionary fiscal consolidations have proven largely elusive. The difficulty of achieving GDP growth while reaching primary fiscal surplus targets is very evident in Greece. Avoiding rapidly escalating government debt to GDP ratios has consequently proven very challenging. Even if the arithmetic of avoiding a debt trap can be made to work, the rise of opposition parties in the eurozone suggests there are indeed political limits to fiscal consolidation. The Ponzi like nature of requesting new loans in order to service prior debt obligations, especially while nominal incomes are falling, is a third issue that Syriza has raised, and it is one that informed their opening position of rejecting any extension of the current bailout program.
The Troika has responded to these points by ignoring the substance of these direct challenges to their preferred approach, and by hardening their bargaining stance. Syriza’s opening request for debt reduction, based in part on recognition of the above points, has been summarily rejected. In addition, the ECB announced that in its estimation, Greece has failed to abide by the terms of the last bail out agreement, so the ECB will no longer accept Greek government debt as collateral for liquidity provided to Greek banks. This leaves the Greek banking system relying upon the ECB’s Emergency Liquidity Assistance (ELA) facility, which can be cut off with two weeks notice on the vote of a two-thirds majority. If the February 28th deadline for extending the existing bailout program is not met or somehow postponed, Greece is likely to face funding difficulties. Even if Syriza can find some sort of bridge loan, large debt payments loom this summer.
The nuclear option of exiting the eurozone does exist, though Syriza did not campaign with this explicit threat, nor have polls of Greek citizens to date supported such an exit. Executing an exit would likely impose even harsher conditions on Greek citizens in the short run. The sharp decline in a newly introduced currency would be likely to significantly raise the cost of imported goods. In the case of Greece, with fuel, food, and medicine making up a large share of the import bill, this is no trivial matter. The banking system could be hamstrung with deposit flight and insolvency. Debt contracts not under Greek law could not be redenominated in the new currency, and so either default, or a very heavy servicing cost would likely result. In either case, Greece would likely find external finance effectively shut off for some time after their departure. Exiting the euro is an option, but not one without significant upfront political and economic costs.
The task for anti-austerity parties like Syriza then becomes to thread the policy needle – namely, to exit austerity, without exiting the euro. In the absence of a sufficient improvement in the current account, or a significant shift in household and business investment spending relative to their desired saving objectives, some degree of fiscal autonomy must be regained if income growth (and hence the ability to service debt) is to be accomplished. The following simple proposal introduces an alternative government financing mechanism, along with safeguards to minimize the risk of abuse of this mechanism, which may accomplish this threading of the needle.
To accomplish this return to growth through increased fiscal autonomy, an alternative public financing instrument could be unilaterally adopted. Federal governments could issue tax anticipation notes (TANs) to government employees, government suppliers, and beneficiaries of government transfer payments. These tax anticipation notes, which are a well-known instrument of public finance used by many state governments across the US, could have the following characteristics:
- zero coupon: no interest payment is due to the holder of the TAN
- perpetual: meaning there is no maturity date requiring repayment of principal, meaning TANs would not increase the public debt to GDP ratios, just like the issuance of perpetual debt by banks counts as equity that helps them meet capital requirements
- transferable: can be sold onto third parties in open markets, as are bearer bonds
- accepted at 1 TAN = 1 euro by the federal government in settlement of private sector tax liabilities.
As the government fulfills expenditure plans, TANs could be distributed electronically to the bank accounts of firms and households due to receive these payments using an encrypted and secure transaction system. Because there are large backlogs of payments due by the Greek government, and there are also backlogs of unpaid taxes, TANs should find ready acceptance. Essentially, the government would be securitizing the future tax liabilities of its citizens, and creating what amounts to a tax credit. This tax credit will not be counted as a liability on the government’s balance sheet (British consols were are a historical example of this), and will not require a stream of future interest payments – payment that could increase fiscal expenditures, and hence fiscal deficits, in future budgets. Governments issuing TANs could thereby pursue the expansionary fiscal plans that are required to return their economies to a full employment growth path.
Questions have been raised as to whether TANs are a parallel currency in all but name, and whether TANs might “trade” at a discount to euros. As noted above, TANs are accepted by the government at 1 TAN = 1 euro. TANs are perpetual, zero coupon bearer bonds denominated in euros, not in new drachmas. Since even under the various treaties ruling the eurozone, governments retain the right to impose taxes on its citizens, and can define what they will accept for taxes, there is a “market maker” with fairly unrestricted “buying power” to insure the 1 TAN = 1 euro link is upheld. For example, should TANs begin to trade at a persistent discount between private citizens, demand by taxpayers for TANs would increase (since this would be the less costly way to meet tax obligations), pushing the TANs back to parity with the euro.
Questions have also been raised as to whether TANs would trigger default clauses in existing government bonds. Recall that TANs were not designated for payment of interest or principal on existing debt. Citizens will also have full discretion over whether to use TANs or euros to pay taxes. There can be no argument that TANs represent a prior claim on tax revenues, thereby subordinating existing bonds.
One explicit cost of the TAN approach could be the imposition of fines if the 3% fiscal deficit to GDP ratio of the Growth and Stability Pact is violated. However, Germany and France openly violated this threshold in 2004 with no fines imposed, possibly setting a precedent for contesting any such fines. Moreover, if expansionary fiscal plans are pursued with the use of TANs, and that fiscal stimulus is successful enough to revive income growth, tax revenues will be likely to rise, and realized fiscal balances may end up above the 3% deficit threshold. After all, the outcome of recent episodes of fiscal consolidation has been rising, not falling debt to GDP ratios.
In addition, in countries with chronic current account deficits that are in excess of 3% of GDP, the simple analytics of double entry bookkeeping imply countries will need to violate the 3% fiscal deficit to GDP rule if their domestic private sectors are to be kept off of deficit spending paths. Otherwise, fiscal policy restrictions end up exacerbating household and business debt build-ups, thereby increasing financial fragility in the private sector. The authors of the fraudulently titled Stability and Growth Pact (SGP) appear to have ignored this accounting implication, and thereby introduced a different vector of financial risk into the eurozone, and one that has revealed it devastating consequence in the aftermath of the Global Financial Crisis (GFC) of 2007-8. The fiscal deficit floor rule of the SGP deserves to be challenged and reviewed, not only because it can introduce the unintended consequence of a private sector debt build up, as was witnessed in many eurozone peripheral nations heading into the GFC, but because it has failed so miserably in its stated purpose of reducing public debt to GDP ratios.
It is true that TANs are unlikely to be accepted by trading partners of nations adopting TANs as an alternative financing instrument, unless those trading partners face tax or tariff liabilities in the countries adopting this alternative financing mechanism. However, TANs are likely to be used in domestic market transactions, which may also free up more euros to pay for imports of essential goods like food, fuel, and medicine. Of course, to make this alternative financing mechanism work, enforcement of tax collection will need to be improved. A more equal distribution of the tax burden across citizens would also assist in the wider acceptance of these notes in private transactions.
While the onset of price deflation is more the concern in the eurozone of late, some may fear this alternative financing mechanism would offer a quick route to accelerating inflation, if not hyperinflation, since the constraints on government budgets would be reduced. To address this issue, it might be helpful for the central bank of each country to be held responsible for monitoring domestic inflation conditions, and for creating robust early warning systems. Both exercises could be overseen and validated by an independent third party – say IMF or ECB staff. Rules could then be set in place requiring a reduction in the issuance of TANs should inflation accelerate through some predetermined ceiling over some specified duration. A provision for ratcheting TAN issuance down further if inflation is not headed back down below the target could also be designed.
In addition, specific supply bottlenecks that may be contributing to inflationary pressures could be identified and addressed through infrastructure spending, labor training, or tax incentives using TANs. TANs could also be used to implement an employer of last resort approach (ELR) to job generation, which could also have a stabilizing effect on inflation. Rania Antonopoulos, Deputy Minister of Labor and Social Solidarity in Greece, has already run a trial experiment of ELR in Greece, and is prepared to scale this up in her new post (see an outline and policy simulation of how this could be done here). It is not hard, in other words, to create the demand and supply side policy mechanisms that could reduce the odds of an ever-accelerating inflation. It is the outright fear of such an outcome that appears to motivate the bias toward fiscal stringency by many eurozone policy makers. The Troika appears haunted by the hyperinflationary ghosts of the early Weimar Republic, while completely forgetting it was Bruning’s devastating fiscal austerity polices that ushered in the Third Reich. History reflects that damage was done both ways, so let’s chose to learn the full lessons of history, rather than repeat the same deadly mistakes.
Austerity has proven to be a disaster on nearly all fronts. Firms have been bankrupted, households have dropped into abject poverty, banks have lost capital to loan losses, tax revenues have come up short or have been hijacked to service debt (debt that was ultimately issued to socialize bank loan losses), and government debt to GDP ratios have risen. Economies are evidently not drawn to full employment growth paths when instruments like fiscal policy, exchange rates, and monetary sovereignty are drastically circumscribed, ostensibly so that prices are free to adjust to market forces. We should have known this from the theories of John Maynard Keynes, Irving Fisher, and Hyman Minsky, and now we should know it from historical experience. Yet this fatal neoliberal conceit in the self-adjusting properties of unfettered markets was the central premise, as well as the fundamental design flaw, behind the European Monetary Union.
Countries may be able to exit austerity policies without having to take on the many challenges of exiting the euro. It may be possible to thread the policy needle in the eurozone. Through the alternative financing mechanism of TANs, countries like Greece may be able to counter the threat of a cut off of financing by the Troika. Policy simulations of the use of TANs by economists at the Levy Economics Institute look eminently plausible (see from p. 11 on in the Strategic Analysis from a year ago, which can be found at the Levy Institute). After too many years of devastating austerity driven by misinformed and utterly misguided policy choices, countries may be able to regain some control over their fiscal policy, and finally forge a pathway back to full employment. With the ploys of the Troika revealed with the emergence of an anti-austerity party like Syriza to a position of governance, Greece has a chance to pave the way out of austerity without exiting the euro. Yanis, get a TAN.
Rob Parenteau CFA, is sole proprietor of MacroStrategy Edge and a research associate of The Levy Economics Institute.