Wednesday, April 27, 2011

Large Deficits, Deficits Everywhere—Well, Almost Everywhere

The European Union statistics agency yesterday released new information about deficits and debt in 2010.  Despite severe austerity measures, Greece is still running a budget deficit of 10.5% of GDP.   Spain and Portugal had deficits of slightly more than 9% of GDP.  It is not news that these nations have serious fiscal problems.  But perhaps surprising is that Britain’s deficit is as large as Greece’s, at 10.4% of GDP.  (The U.S. deficit is in this ballpark.)  The new government in Britain has slashed spending, yet economic growth has been stagnant, and the deficit remains huge.

What was even more striking to me was the figure for Ireland, which has a budget deficit equal to 32.4% of GDP.  That’s 32.4%, not 3.24%!  Not long ago Ireland was the darling of supply siders.  Its extraordinarily low corporate tax rate enticed many multinational corporations to set up operations there.  The country’s rapid economic growth was the envy of the other developed countries.   Yet bubble conditions spread to the banking system, and as occurs with most busts, unsustainably rapid credit growth lend to excessive expansion and speculation.  Its burst bubble and collapsing GDP made its relative deficit explode.

But not all developed nations are fiscal basked cases.  Sweden, not thought of as a paragon of capitalism, is running a budget surplus.  Canada, though not in surplus this year, has a deficit of only about 2% of GDP, and it has been in surplus or close to it in recent years. 

The U.S. deficit, in contrast, is about 10% of GDP, and Standard & Poor’s is threatening a ratings downgrade of U.S. government debt.  Perhaps the U.S. can emulate the Canadian experience from the last two decades.  In the early 1990’s, Canada had large deficits and growing national debt.  By the mid 90’s, Canada’s debt was downgraded.  That was a national embarrassment to Canadians, who reached a political consensus to take tough action.  The budget was back in surplus by 1998, and the country’s debt was again rated AAA by 2002.  Could the same thing happen in the U.S., politically polarized as it is?  I can dream, can’t I?

Steve Lehman

S & P 500:  1355
Russell 2000:  858

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