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While High Government Debt Levels Could Hasten Economic Recovery Post Recession, There Are Many Long-Term Negative Consequences 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. 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. Source: Congressional Budget Office, “Federal Debt and the Risk of a Fiscal Crisis.” 7/10. www.kpcb.com USA Inc. | Consequences of Inaction 425 Lessons Learned: For Countries Burdened by High Debt Levels, Austerity Measures are Necessary en08 Gross Debt Deficit as as % of GDP 2009-2010 Austerity Measures New Revenue Streams % of GDP ° Greece e Wage freeze & bonus cut of 14% on — « Joint IMF—EU bailout of $146B | | all publicssectaremployess 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 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 5 : ‘ 3 5 employees e 1% tax rise on personal income 11% 66% about 120K euros Spain e $1.5B+ broad spending cuts in P healthcare & infrastructure e Hiring freeze for public sectors e Sold $7B in new bonds 6 5 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 employees executives 9% 78% . a og : : e Reduce state payroll via attrition e Privatize state-owned industries K P Source: Eurostat, European Commission, IMF, New York Times, Financial Times, BBC, Wall Street Journal. (@E www.kpcb.com USA Inc. | Consequences of Inaction 426 HOUSE_OVERSIGHT_021054