G20 Fiscal Goals: Like Losing Half Your Pregnancy Weight
The declaration from the G20 meetings in Toronto this past weekend sounds, at first, to be taking a strong stance on fiscal consolidation.
“There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth. Reflecting this balance, advanced economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016.”
Ok, that sounds pretty good, but wait a second. Halve deficits? This is that old game started in the Bush years and taken up by the Obama administration of halving something from a completely nutso starting point and calling it a victory. It’s like setting a goal of losing half your pregnancy weight.
The projected deficit for 2010 is 10.3% of GDP. It would drop to 4.5% by 2013 under the President’s budget. Under a current law scenario, it is projected to be 3.1% of GDP that year—so significantly better. Economic improvements alone are easily expected to cut the deficit in half by 2013 – this requires no change in policy in the U.S. So not exactly a heavy lift.
But then again, what happens in 2013 is probably less important than thereafter. The goal of stabilizing the debt by 2016 is a big deal. Keeping the debt-to-GDP ratio stable requires that the long-term deficit problems—driven by healthcare costs and aging—are addressed. You can’t get there any other way. This would be a huge accomplishment.
Not allowing the debt to grow faster than the economy is necessary to get control of the situation, as is getting debt levels back down to a manageable level where fiscal flexibility is preserved. We have recommended 60% by 2018 and lower thereafter. Anything higher would leave the U.S. without the fiscal firepower to respond to future crises.
As we have said before, we need both a medium-term goal and a long-term goal, both of which are included in the G20’s Declaration this weekend.
An important question is whether these G20 targets are credible. President Obama did not emphasize the fiscal targets in his remarks, and his administration is currently more focused on stimulus measures than specific measures to get the budget under control. But there needs to be a credible commitment to budget reform to reassure financial markets and keep our interest rates from rising. Also, given the political environment, it appears there will be little appetite for further stimulus measure unless important measures are taken that will get the debt under control.
The best path forward—something recognized in the G20’s Declaration—is an emphasis on necessary short-term stimulus along with putting in place medium-term budget plans. The U.S. needs to focus on both. Rather than pairing back stimulus measures, the key here is to craft effective short-term stimulus while putting in place the medium-term budget changes. Other countries are ahead of us on this piece, and the U.S. should step up the emphasis on policy changes to get the budget under control. Without growth and a credible consolidation plan, our fiscal situation will remain precarious.