Tuesday, April 18, 2017

Can We Kick the Budget Can down the Road Again?

We've kicked the can down the road so many times, we have a sore foot. This month our friends in the Federal government will create another ring in their circus called shutting down the government. It will be a colorful display of clowns before they get all serious and make another short-term compromise that will get us through the end of October. I'll drink a JD to that! Cheers.

The can-kicking has put us in one of those rock-and-hard place situations. We are used to the fact that government likes to spend more money than they raise from taxes. So each year the government borrows, and each year what the government owes to its creditors gets bigger. But a funny thing happened on the way out of the last recession -- our Federal Government Budget Deficit increased more than usual. And as a result, the US national debt has reached a size that we are not comfortable with. In terms of the size of the US economy, the net national debt is now double what it was way back in the good old days of 2008.

Put it on a personal scale. You have a large student debt. But now you want to spend the summer in Europe with your friends. Banks have your photograph in their lobbies, and you cannot borrow a penny for your business-class seat to Barcelona. Something has to give. You might have to sell your new car but you owe more than its worth. Or maybe you will need to get a part-time job. Ouch, whatever, the choices are not easy.

Republicans who want to spend more on X will scream about the stupidity of spending on Y. Democrats will decry the heartlessness of lowering spending on Y and the waste of more spending on X. Of course they could compromise on spending but it's more fun to wear a clown suit and honk horns.

As part of my therapy, I thought I might look at some numbers that compare the US to the rest of the world. Luckily, the International Monetary Fund publishes figures on government deficits and debts. In October 2016, they published a report called the World Economic Outlook where they looked at the world economy and made forecasts about the future. The table below comes from their online data appendices. The data for 2017 are forecasts made last October.

The table contains government deficit figures for selected countries. The column marked 2008 has deficits right before the great recession. The column marked Peak has data from either 2009 or 2010 depending on when the deficit was the biggest. The next column measures how much the deficit increased to the peak. Then comes the forecast deficit for each country in 2017 and how it has adjusted since 2008. Deficits are measured as a percentage of GDP for each country. Some thoughts from the table:

World investors are watching all these countries for signs of economic weakening. And with emerging market deficits rising so much, any hint of weakness anywhere has the potential to spook investors and move capital around the globe in gusts.

The US is a major country but is not exempt from investor decisions. Right now we don't look like the worst kid on the block. But if we kick the can down the road again while other countries appear to be more grown-up, then we may be amazed at how nasty those global investors can be. We won't be complaining about the value of the dollar being too high then.

Most countries had budget deficits in 2008. Most countries had deficits in that year though a number of resource-rich countries like Norway and Saudi Arabia had surpluses. The average deficit for advanced nations was -3.5%. The US was among a few with the largest deficits in 2008 with -6.7% of its GDP.

Then the great recession happened. This impacted the deficits in two ways. First, the weak economy automatically generated less tax revenues and more spending. Second, governments used expansionary policy to pump up the economy with more spending and less taxes. Notice the US had one of the largest increases from -6.7% to -13.1% of GDP.  Spain, Ireland, Russia, and a few other places managed to increase their deficits even more than the US.

The good news is that by 2017, most countries reversed their deficits. A combination of recovery from the recession and less accommodative budget policies brought deficits down. Most advanced countries will end up with deficits in 2017 that are smaller than those from 2008. The positives signs in the last column show the movements toward surpluses or larger surpluses. The average budget betterment for advanced countries amounts to almost 1% of GDP.

The more interesting and challenging part of the table relates to the developing or emerging countries. The table shows that their budgets were not quickly impacted by the great recession. But as the global contraction spread, they were increasingly affected. Emerging markets started with surpluses (0.8%) in 2007 which worsened to -3.8% within a couple of years and are expected to be -4.6% in 2017. Russia began the time with a surplus and now has a deficit. Venezuela, Saudi Arabia, and Libya each have extremely large budget deficits in 2017.

So what? While many countries have moved towards smaller annual budget deficits, the lasting impact of years of deficits is that most debt loads are larger. The US net debt load is now double what it was before the recession. Germany and Canada find themselves without increased debt burdens, but most of the other advanced countries have higher loads ranging from 30% for Italy to 140% for the UK.

2008 Peak Change 2017 Change
08 to Peak 08 to 17
Advanced -3.5 -8.7 -5.2 -2.7 0.8
USA -6.7 -13.1 -6.4 -3.7 3
Euro Area -2.2 -6.3 -4.1 -1.7 0.5
Germany -0.2 -4.2 -4 0.1 0.3
France -3.2 -7.2 -4 -3 0.2
Spain -4.4 -11 -6.6 -3.1 1.3
Greece -10.2 -15.2 -5 -2.7 7.5
Ireland -7 -32.1 -25.1 -0.5 6.5
Japan -4.1 -10.4 -6.3 -5.1 -1
UK -4.9 -10.5 -5.6 -2.7 2.2
Norway 18.5 NA NA 3.2 -15.3
S. Korea 1.5 NA NA 1.1 -0.4
Canada 0.2 -4.7 -4.9 -2.3 -2.5
Emerging 0.8 -3.8 -4.6 -4.4 -5.2
Russia 4.5 -5.9 -10.4 -1.5 -6
China 0 -1.8 -1.8 -3.3 -3.3
India -10 NA NA -6.6 3.4
Brazil -1.5 -3.2 -1.7 -9.1 -7.6
Mexico -0.8 -5 -4.2 -3 -2.2
Turkey -2.7 -6 -3.3 -1.6 1.1
Argentina 0.2 -2.4 -2.6 -7.4 -7.6
Venezuela -3.5 -8.7 -5.2 -26.1 -22.6
Libya 27.5 -5.3 -32.8 -43.8 -71.3
Saudi Arabia 29.8 -5.4 -35.2 -9.5 -39.3
Sub-Saharan Africa 1.3 -4.5 -5.8 -4 -5.3
Source: IMF Tables World Economic Outlook October 2016
Tables from B Appendix 


  1. Dear LSD. As a kid I played a lot of kick-the-can . . . all the way down 75th terrace, into adjoining yards, and all over. One of my fav games . . . apparently a fav in DC-land, too—I think we’ll see a lot of it.

    1. I didn't know that Tunas could kick. Or maybe it was a can of tuna?