An American economist has called for consolidating the central bank and government’s budgets and balance sheets saying such a move can prevent sovereign default risks and ensure better fiscal and monetary outcomes. According to Citigroup global chief economist Willem H Buiter, the size and the composition of a central bank’s balance sheet have serious fiscal implications. “Because national treasury is the beneficial owner of the central bank, it makes sense to consolidate the single period (instantaneous) budget identities, balance sheets and intertemporal budget constraint (IBC) of the state and of the central bank and work with a consolidated single period budget identity, balance sheet and IBC of the state,” he said.
Buiter, the Dutch-born American-British economist, was speaking at the 16th C D Deshmukh (RBI’s first Indian Governor) memorial lecture on April 11 where media was not allowed.
As per RBI’s website, Buiter said at the lecture that the monetary policy of any central bank has an unavoidable fiscal dimension because the fiscal theory of seigniorage is the right way of thinking about the inherent fiscal dimension of monetary policy.
Seigniorage is the profit that a government makes by issuing currency, especially the difference between the face value of coins and their production costs.
Buiter said the national treasury benefits from a central bank’s profit or surplus, regardless of its ownership arrangements and irrespective of the degree of operational independence that it may have when it comes to the design and implementation of the monetary policy.
Speaking on the theme of ‘The good and the bad fiscal theory of the price level’, he said there is no evidence of a central bank of any large economy making losses even though it does not own its balance sheet responsibility.
He said central banking is profitable due to its unique liquidity properties and monetary liabilities coupled with the large deposits it holds for commercial banks. It can be noted that the Reserve Bank of India had last July transferred Rs 65,876 crore of its surplus as a dividend to the government, which was Rs 20 crore less than it had transferred in fiscal 2015 at Rs 65,896 crore.
Unlike the private sector, the state (consolidated central bank and national treasury) is not subject to intertemporal budget constraints while choosing to increase or lower public spending, taxation, monetary issuance and policy rates, Buiter said. This in normal circumstances leads to the belief that fiscal, financial and monetary policy of the government and central bank will not create any problems of sovereign default and insolvency.
Buiter said though it is true that the state has two unique funding sources — taxes and seigniorage — not available to the private sector, it does not mean that the state is not subject to its own IBC. Also, because the simple logic is that debt cannot grow forever at a higher proportional rate than the interest rate on the debt, he added.