The U.S. Budget Challenge in International Context

A few weeks ago, the International Monetary Fund released a report analyzing the fiscal situation of the world’s largest economies. As I discuss at greater length in a piece over at e21, the IMF finds that the United States is not alone in facing daunting fiscal challenges. For example, the IMF predicts that the United States will have the fifth highest structural primary budget deficit in 2010:

Now you might be wondering what a structural primary budget deficit is. Good question. The “primary” part means that the IMF excludes from the calculation any interest that governments are paying on their outstanding debts. That’s a useful thing to do if you want to focus on the programmatic spending and revenue decisions that governments are currently making. The “structural” part means that the IMF has tried to strip out the effects of the business cycle to identify the underlying posture of government policy. (Because of the weak economy, the IMF estimates that the U.S. primary deficit will be 8.1% of GDP in 2010, much higher than the 3.7% of GDP structural primary deficit.) And just to round out the details, you should also be aware that to make things comparable across countries, the IMF combines all levels of government together, so the U.S. figures include not only the federal government, but also the state and local governments.

With that context, the basic message of my first chart is that the United States has a very large structural primary deficit, but a few countries are even worse off: Japan (which has been running large deficits for years) and Ireland, the United Kingdom, and Spain (which had more severe credit booms and busts than we did, suggesting that the crisis had some structural effects, not just cyclical ones). At the other extreme, Norway is sitting pretty with its oil revenues.

The IMF also estimated how large a fiscal adjustment (i.e., spending reductions and tax increases) each economy would have to undertake to get their government debts back to a reasonable level. The basic idea is that, at a minimum, nations should run small primary surpluses and, in addition, some (including the United States) may need to reduce the size of their debts relative to the economy. Using a quite ambitious debt target (60% of GDP for the gross government debt for most countries), the IMF projects the following adjustments would be necessary:

If you take these results at face value, they suggest that the United States will have to cut spending and increase revenues by a combined 8.8% of GDP between 2010 and 2020, a fiscal adjustment of around 0.9% per year. Imagine having to enact a permanent spending reduction or tax increase of $120 billion per year next year, and then do it again in each of the next nine years. Rather daunting.

One can, of course, quibble with the specific assumptions that IMF has used. For example, getting the gross government debt down to 60% of GDP (about where it was before the financial crisis) may be a bridge too far. But clearly the United States will have a lot of work to do. But hey, things could be worse. We could be Spain, Ireland, the UK, or Japan.

About Donald Marron 294 Articles

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including: * Member of the President’s Council of Economic Advisers (CEA) * Acting Director of the Congressional Budget Office (CBO) * Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.

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1 Comment on The U.S. Budget Challenge in International Context

  1. Ireland has to borrow a few billion where as the US has to borrow trillions. It is much harder to raise trillions of dollars then a few billion. But you are right about Japan. They are the financial basket case of the world. The government will go bankrupt with in the next 5 to 10 years. But is not like we (USA) are far behind that.

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