From the OECD:
Instability in sovereign debt markets poses another serious risk. It has highlighted the need for the euro area to strengthen its institutional and operational architecture. Bolder measures need to be taken to ensure fiscal discipline, says the Outlook.Several countries are already taking early action to enhance the credibility of their fiscal consolidation plans and this is very welcome.
“This is a critical time for the world economy,”said OECD Secretary-General Angel Gurría. “Coordinated international efforts prevented the recession from becoming more severe but we continue to face huge challenges. Many OECD countries need to reconcile support to a still fragile recovery with the need to move to a more sustainable fiscal path. We also need to take into account the international spill-overs of domestic policies. Now more than ever, we need to maintain co-operation at an international level.” (Read the full speech).
With a huge debt burden weighing on many OECD countries and the strengthening recovery, the emergency fiscal measures provided by governments to tackle the crisis must be removed by 2011 at the latest, the Outlook says. It adds that the pace of such action must be appropriate to particular conditions and the state of public finances in each country.
Here is a chart from the report showing debt levels in various economies:
There are several important points to make right now:
First, in the US this is not a new problem -- the debt issue has been with us for some time and has increased over the last 10 years. Consider this information from the Bureau of Public Debt, which shows total outstanding debt at the end of each federal fiscal year:
| 09/30/2009 | 11,909,829,003,511.75 |
| 09/30/2008 | 10,024,724,896,912.49 |
| 09/30/2007 | 9,007,653,372,262.48 |
| 09/30/2006 | 8,506,973,899,215.23 |
| 09/30/2005 | 7,932,709,661,723.50 |
| 09/30/2004 | 7,379,052,696,330.32 |
| 09/30/2003 | 6,783,231,062,743.62 |
| 09/30/2002 | 6,228,235,965,597.16 |
| 09/30/2001 | 5,807,463,412,200.06 |
| 09/30/2000 | 5,674,178,209,886.86 |
Calculated Risk was one of the first people that I can remember who noted the US has a structural budget problem, caused by a variety of factors. In an ideal world, the government should increase spending as the economy slows to ameliorate the effects of the downturn, but should then decrease spending as the economy grows. That obviously does not happen in the real world.
Compounding that problem is the fact the US went into the financial crisis in terrible fiscal shape at a time when they needed to spend money to prevent the meltdown. When I advocated for the spending programs a few years ago I ran some back of the envelope debt/GDP calculations to see where we would be in a worst case scenario -- no GDP growth and massive debt growth. Assuming that, we would have a debt/GDP of right around 100% in 4 years.
Currently, we have about $12.9 trillion in debt versus a GDP of $14.6 trillion giving us a debt/GDP ratio of 88%. While this is not good, it certainly is not fatal.
I think the OECD is sounding the warning bell early in the hopes of getting everyone's attention regarding the problem.
