Sense on Cents

Living beyond one’s means is a path to long term pain. That path is not in front of us, but rather is upon our nation and many others around the world.

The cost of funding the global government debt and deficits will continue to serve as a drag on our economic future. While financial wizards may believe the debts can be postponed, the simple fact is in the midst of a sluggish economy, global governments will not generate sufficient tax revenues to fund spending programs and the deficits. What does this mean? Lessened spending, increased taxes, and assorted other measures of fiscal austerity.

The Financial Times provides a fabulous review on this topic today in writing, Public Finances: Daunted by Deficits: >>>

Advanced economies entered the financial crisis in 2007 with an average budget deficit of 1.1 per cent of national income. By this year the figure had risen to 8.4 per cent as tax revenues plummeted and humbled banks were bailed out. General government gross debt is set to rise from close to 73 per cent of national income in advanced economies in 2007 to more than 110 per cent by 2015, according to the International Monetary Fund.

Dominique Strauss-Kahn, IMF managing director, says this global rise in public debt requires countries to aim at rapidly reducing borrowing so debt ratios can begin to fall – something he warns will require a sizeable and “sometimes unprecedented” effort. There is little alternative, he adds, as “failing to do so would ultimately weaken the world’s long-term growth prospects”.

Policymakers appear to have got the message. Across the world – from the US to Greece – plans are under way to cut spending and raise taxes. The UK on Tuesday became the latest country to join in the cutting crew. It follows Germany, Spain, Italy and Portugal, which in recent weeks have all also unveiled austerity budgets.

Some differences are already apparent. Advanced economies are initially planning to rely more on spending cuts; emerging countries have plumped more heavily for tax increases. No one is sure what the combined effect of this will be on global growth, but there is sufficient concern about the consequences that the US has put it on the agenda for this week’s meeting of the Group of 20 leading economies.

Add it all up and the simple fact is our domestic economy and the global economy are in for real challenges. Robust recovery? I don’t think so. The following pictorials paint a very ugly picture for what lies ahead. I direct you to the pictograph in the lower right which projects that the U.S. Gross Debt as % of GDP will approach 110% in 2015.

We can not live like that. We will be strangled by our debt service. Compare that figure to the debt to GDP percentage run by Iceland and Greece. “Ruh roh, Reorge!!”

Will America wake up and understand that the ticking time bomb representing our national debt is getting louder and louder?Does Washington have any appreciation for this?

LD

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This entry was posted on Wednesday, June 23rd, 2010 at 12:35 PM and is filed under Deficit, General. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.