Budget Deficit and Liquidity (The Chronicles of Everstate)

Previous episodes’ summary: In 2212 EVT, in Everstate (the ideal-type corresponding to our very real countries created to foresee the future of the modern nation-state), people seek security as they increasingly feel the negative impact of various pressures and threats on their life. Henceforth they turn to their political authorities and even start trying to compel them to provide this security. Through those actions, Everstatans start to remember that, as part of the nation, they are also rulers of Everstate. Yet, the situation is growing worse because the tasks of governance have grown more complex while the governing system and the polity are not yet adapted to the new conditions.

Deepening budget deficit and increasing need for liquidity

The first phenomenon driving  Everstatan political authorities’ incapacity to deliver security is a deepening budget deficit and an increasing need for liquidity.

The resources that participate into obtaining the income necessary to govern have started being impacted by the novel threats and by the evolution in general a few years ago. However, this change happened unnoticed by most and is still largely ignored as new pressures are yet to be recognised. In general, the focus of awareness is on forthcoming so-called resource wars*, generated by the probable end of cheap abundance that is likely to affect natural resources such as water, oil, or minerals, and the scrambling for components in new substitutes such as rare-earth elements.

Yet, the problem is more complex and also far worse. Some of the resources that used to generate income in the past have dwindled.  For example, when Everstatan industries delocalised, related income disappeared. Meanwhile, changes impacting other resources on the one hand, and the emergence of new resources on the other are not yet integrated within the public framework. All affect income.

Governing bodies should be on the watch and receive adequate warnings regarding the need to take in-depth actions. 

However,  the resources extracted from the polity that have usually generated income are taxes levied mostly on the population, through taxes on personal income and social contributions (direct taxes) or through taxes on consumption (indirect taxes). Hence, the negative impact on resources could not and cannot be directly and immediately felt, and thus goes unconsidered. It is mediated by time and by economic activity as well as by impact of the general evolution of society on the wealth and consumption behaviour of people.

Yet, as new pressures pile, most of them without any awareness and thus unattended, while resources and ecological conditions evolve, an increasingly larger impact on the resources of the nation is to be expected, unforeseen, thus unmonitored and, consequently, without any kind of planning to face it. Very real consequences on the nation’s income, even if they are delayed, are in the making.

Meanwhile, the simple fact to try to make sense of some of the new pressures, those that are already perceived, comes with a cost. To fight constantly against such new military threats as terrorism or such unconventional dangers as cyber-threats uses a lot of the available resources and related income, to say nothing of possible new more classical military threats.

The increasingly numerous extreme weather events that are occurring, if they are not always evaluated in such a way, also takes its toll on resources: damages imply a net loss of wealth, while most events such as floods, tempests, or snowstorms immobilise economic activity. The accumulation of those localised and sometimes hardly noticed events has a direct domestic cost that increases expenditures, while it diminishes income and sometimes reduces resources.** Furthermore, when natural catastrophes and extreme weather events hit other countries, Everstate is also impacted through aid and various contributions, lowered trade, potential global ecological impact of disasters and levy on citizens’ savings (which then become unavailable for domestic borrowing, investment or consumption), with further consequences as reduced contribution to taxes.

Everstate is thus faced with a relative (compared with what would have been, had those changes and evolutions not taken place) lowered income, while more resources to face rising expenditures are necessary and increasingly more so, when those new and rising pressures also mean that the task of governing has become harder, which too has a cost, at least initially.

The nation and its governing bodies thus imperatively need to find new resources and income, as well as related new staff, which increases state’s expenditures, which in turn will increase the need for new resources and then income, until a new balance, adapted to the current and foreseeable future conditions, is found.

Solely keeping the system running as in the past is counterproductive because this directly and immediately impacts governance, lowering its efficiency. Being unable to understand what is happening and thus to find the necessary new resources and income means that a satisfactory way to plan for the increasing tasks involved by governance cannot be achieved. This, too, lowers the overall efficiency. As a result, the security that Everstatans seek cannot be ensured. Furthermore, the system is increasingly unable to do so.

Be it perceived and understood or not, this need for new resources and income is very real and upon Everstate. It implies that cash or liquid assets are demanded by Everstate’s governing bodies. First, they have to pay to face all the pressures  identified, to assume impacts’ costs when pressures are not identified, and to finance the usual tasks of governing, when Everstate’s income is insufficient as new resources and income have not yet been found. A new adapted strategy of extraction of resources (for the income of governing bodies) would reduce the need for liquidity, but it has yet to be designed.

In Everstate, as in many other countries, this situation has lasted for quite a while already. However, Everstate’s government and Parliament have dealt with it as if nothing new had happened. They thus used past recipes. As a result, the budget deficit has become chronic. In turn, as deficit is now regularly bridged by debt, on the one hand the cost of the debt further increases the deficit, while the need to borrow further heightens the need for liquidity.

Meanwhile, Everstatans’ quest for security in those gradually more difficult conditions also contributes to increase the demand for liquidity as people still need the now lacking or diminishing resources. Thus, the demand for those resources does not recede. On the contrary, for some of them, it increases as usage of those resources is fully integrated within the developed way of life of Everstatans and its expected improvement. For example, some of those resources have to come from further way or, when possible, have to be created or transformed out of other resources, which implies a further demand for liquidity. This situation also contributes to intensify the demand for understanding and meaning, as Everstatans, as any human beings, need to make sense of their perceived new hardship, so contrary to the promises of the materialistic normative order in which they have lived all their lives.

To be continued…

* See, among others, Michael T. Klare, Resource wars: the new landscape of global conflict, Henry Holt, 2002.

** See, for example, Holly Riebeek, “The rising cost of natural hazards,” Nasa Earth Observatory, March 28, 2006, accessed April 14, 2011; Munich RE NatCatSERVICE: Natural Catastrophes in 2010, 2011, Geo Risks Research, NatCatSERVICE ; and corresponding press release, accessed April 14, 2011.