a ten years ago The Treasury was suffering from austerity fever. The government was doing everything it could to reduce the budget deficit, despite high unemployment and sluggish economic growth. Today the situation is very different. Most Western economies are in good shape. People have jobs. Corporate profit growth is steady. Despite this, the government spends more than it receives.
No government is more profligate than America. This year, the world's largest economy is projected to have a budget deficit (spending that exceeds taxes) of more than 7%. GDP-This is an unprecedented level outside of recession and wartime. But it's not just a wasteful country. Estonia and Finland are two normally frugal Nordic countries with large budget deficits. Italy's budget deficit last year widened to the same extent as in 2010-2011 after the 2007-2009 global financial crisis, and France's deficit rose to 5.5%. GDP, far exceeded expectations. Finance Minister Bruno Le Maire announced last month that he was “calling for a collective wake-up call to make choices about all public spending.”
Some countries are more modest. Cyprus was in the black last year. Greece and Portugal appear to be models of fiscal consolidation, even though they remain heavily indebted. Still, the overall direction is clear. economist analyzed data from 35 rich countries.On the other hand, from 2017 to 2019, the sample country median was The government had a budget surplus, but last year it had a budget deficit of nearly 2.5%. GDP (See Figure 1). Measures of “primary'' deficits (excluding interest payments) and “structural'' deficits (exclusion from the business cycle) also rose sharply.
There are two factors that explain the splurge. The first one concerns taxes. In the affluent world, receipts are surprisingly fragile. In the United States, income tax revenue withheld from paychecks decreased slightly last year. Meanwhile, “income taxes not withheld at source,” including capital gains, fell by a quarter. UK capital gains tax is 11% below its recent high. Japan's self-assessed tax amount for this fiscal year, which includes part of the tax on capital gains, is expected to be 4% lower than last year.
Tax officials are suffering from market turmoil in late 2022 and early 2023. Tech companies that pay high salaries are laying off workers and reducing their income tax burdens. As stock prices fell, it became more difficult for households and investors to sell their stocks for a profit, reducing the pool of capital gains. Few people made money flipping houses last year as real estate prices fell. It's been a bad year for senior staff at private equity firms, who often earn their income in the form of investment returns rather than a traditional salary.
The second factor is national spending. In response to the all-out fiscal policy caused by the coronavirus pandemic, governments around the world are shrinking their budgets, but not completely. In Australia, older people in care homes may be able to receive financial support during the coronavirus outbreak. It was not until mid-2023 that Germany fully rolled back the employment protection schemes it implemented during the pandemic. America is still handing out large tax refunds to small businesses that kept people afloat during the lockdown. In Italy, a project designed in 2020 to encourage homeowners to green their homes has spiraled out of control, with the government so far disbursing aid worth €200 billion (or 10% of the population). are doing. GDP). The name “Super Bonus” for one of his schemes would be funny if it weren't so illegal.
Politicians are also prepared to step in and spend money to right perceived wrongs. After Russia invaded Ukraine and energy prices soared, European governments allocated about 4% of their energy. GDP Protect your home and business from impact. A handful of countries, including Poland and the Baltic states, are currently spending large amounts of money on guns and soldiers. President Joe Biden wants to eliminate as much student debt as possible before the US presidential election in November.
How long can a fire hose keep exploding? At first glance, it looks like it could last for a while. The market has crashed and tax revenues will increase. And the sustainability of government debt does not just depend on what happens to budget deficits. It is also a product of overall public debt, economic growth, inflation, and interest rates. Inflation has been high and growth has been strong since the end of the pandemic. Although interest rates are rising, they are still fairly low by historical standards.
This situation puts politicians in a financially advantageous position (see Figure 2). It is calculated that in 2022-2023, the median rich country could have achieved a primary budget deficit of around 2%. GDP and still reducing public debtGDP ratio. The nominal value of the debt would have risen, but inflation would have further expanded the size of the economy. Some countries faced even more favorable circumstances. Italy's debt ratio fell by about 10 percentage points. GDP Despite accommodative fiscal policy, it has declined from its peak in 2021. France's ratio also decreased slightly.Greece has reduced its debt through a combination of good economic conditions and fiscal austerity.GDP The ratio fell by an astonishing 50 percentage points.
american exceptionalism
But now things are changing. Despite declining economic growth and inflation, the interest rates facing governments have not yet fallen. This already makes financial calculations even more difficult. For example, the main position of the Italian government is consistent with a stable debt ratio, reduced from a deficit of 1%. GDP According to our calculations, we had a surplus of 2% last year. America is in a fairly similar position. Further declines in inflation, slower growth, or higher interest rates will make it more difficult for governments to stabilize their debt.
No wonder there's been a lot of talk about fiscal consolidation lately. The Italian government believes they will soon face disciplinary action from the government. european union Because of that stance. In Britain, the opposition Labor Party, which hopes to come to power soon, has promised fiscal consolidation. The French government is talking about cutting health spending and unemployment benefits. America is an outlier. The debate has not yet changed direction in the world's leading economic powers. Ahead of the election, Donald Trump and Biden have promised tax cuts for millions of voters. But fiscal logic is unforgiving. Whether they like it or not, the days of politicians spending money freely will have to end. ■
