While High Government Debt Levels Could Hasten Economic Recovery Post Recession, There Are Many Long-Term Negative Consequences e Crowding Out Investment » Lower Output & Income — A growing portion of people’s savings would be diverted to purchase government debt rather than toward investment in productive capital goods. e Higher Interest Payments = Higher Tax Rates & Lower Output & Income — Government may be forced to raise marginal tax rates and / or reduce spending on other programs to meet interest payments. e Reduced Ability to Borrow > Less Policy Flexibility — In case of economic downturns or international crises, government may not be able to raise substantially more debt. e Increased Chance of Sudden Fiscal Crisis Social / Economic Disruption — Investors may lose confidence in government’s ability to repay debt & interest without causing inflation. KP Source: Congressional Budget Office, “Federal Debt and the Risk of a Fiscal Crisis.” 7/10. Ce USA Inc. | Consequences of Inaction 425 Lessons Learned: For Countries Burdened by High Debt Levels, Austerity Measures are Necessary eign Gross Debt Deficit as 2009-2010 Austerity Measures New Revenue Streams as % of GDP % of GDP Greece e Wage freeze & bonus cut of 14% on © « Joint IMF—EU bailout of $146B | | all publicrsectaremployess e Tax increases for VAT (+2%) / Pl — e Reduction in government contract fuel / alcohol / cigarette (+ 10%) 14% 113% workers : ee e Clamp down on tax evasion es e 11% reduction in pensions & Increase in retirement age to 65 from Ireland 58 e 5-15% pay cut & 4% benefit e Carbon tax on fuel reduction for all public sector é : ‘ 3 5 employees e 1% tax rise on personal income 11% 66% about 120K euros = e $1.5B+ broad spending cuts in Spain healthcare & infrastructure e Hiring freeze for public sectors e Sold $7B in new bonds A = US 6 e Increase of retirement age to 67 11% 94% from 60 Portugal e Total budget cut of $70B 10-13E e Wage freeze on all public sector e 50% bonus tax on top bank em