Political leaders have so frequently cried wolf over budgetary spending that voters are skeptical about talk of budgetary crises. This is unfortunate, since deficits should arouse genuine concern, particularly as their size in some industrial countries is daunting. Yet, the absolute size of deficits is not their most alarming aspect. Rather, the persistence of budgetary shortfalls during a long period of peace, when governments traditionally pay off debts and save for the future, should set the alarm bells ringing. Furthermore, projected increases in the cost of government programs, as populations age and economic growth lags, give cause for further concern.
The above is an extract from this paper by IMF from around 25 years ago. Although this is being said in 1996, it is much more relevant now. Most of the world’s largest economies have been operating on fiscal deficit basis for this period. (For example, in the last 50 years, US has had only 5 budget surplus years, China, once in perhaps last 30 years, Japan, five times in last 40 years or so, India, none, UK – thrice in a similar period). Since Covid and related government expenditure increase, the absolute numbers and the size of deficits have reached levels never seen before. Very few countries actually report a budget surplus. A deficit is when government spends more than its income.
Generally, as long as growth can keep pace, the deficits are hoped to be reocuped soon, but a consistent use of deficits for funding government expenditure means an incessant borrowing from the future. With continued deficits, the debt levels for govt have gone up. If pushed against existential concerns (a war, or in current times, Covid), governments tend to lean on future like that, but in peace times, this continued expenditure is perhaps a question to be asked much more.
During the nineteenth and early twentieth centuries, fiscal deficits and surpluses were small in the major industrial countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States), and a chart of fiscal balances would show a fairly stable trend line. World War I (1914-18) altered the picture radically, as its participants emptied national treasuries and borrowed against the future in a desperate struggle to survive. The interwar period saw a return to “normalcy” that brought the huge deficits contracted during the war down to manageable size in nearly all countries. World War II (1939-45) and the immediate postwar years repeated the fiscal experience of World War I and the interwar period–immense deficits in all countries followed by surprisingly satisfactory progress toward fiscal balance. Nevertheless, a disturbing trend began in the 1960s and gained seemingly irresistible momentum by the 1970s. The normal peacetime condition of near fiscal balance gave way in almost every industrial country to large and obdurate fiscal deficits.
Large deficits emerged after the oil crisis in the mid-1970s and widened dramatically after 1980, largely the result of government overspending rather than meager tax receipts. Government expenditures in industrial countries rose from 28 percent of GDP in 1960 to 50 percent in 1994. These deficits have sharply increased the public debt (the accumulated burden of yearly budget deficits), which jumped to 70 percent of GDP in 1995 from 40 percent in 1980, weakening government finances and draining resources from the economy. Aging populations and sluggish economic growth add urgency to this worrisome trend. Governments now have little choice but to restructure their spending programs.
Where the deficits level vary from year to year, the level of debt implies the accumulating effect of continued deficits for a long time. The current picture on Debt to GDP is as follows. This table here shows the indebtedness of top 10 economies of the world. Just as an indicative reference, these countries total to around 70% of the global GDP, and the debt levels are significantly higher than 1995 levels.
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For me, what stands out is that this deficit funding has become a habit – introduced during war times, and then to fuel economic growth (with a long term plan of consolidation and reducing deficit), this seems to have become a norm for governments. And in the developing countries too, which so far seemed insulated because government expenditure on social benefits was not as high, and general savings culture (citizens’ self reliance rather than govt dependence) with generally higher growth rates, now as they reach higher levels of development, seem to be treading on the well-trodden path that the developed countries have seemed to lay down (to look up data). There are few countries that have managed to consolidate fiscal position by taking up programmes that last over a few years with the aim of reducing deficits. (To look these up too)
As to the why these ‘unsustainable deficits’ persist:
Most economists agree that commitment to social welfare programs, demographic trends, and fundamental macroeconomic shifts are the main causes of the deterioration of fiscal positions across the industrial world and that each of these factors needs to be addressed for budgetary balance to be achieved.
Perhaps for recent times, add the interest costs on the growing debts to govt expenditure too. Given that the last 25 years since this paper have not seen any respite in these persisting deficits, perhaps it is worth taking a deeper look at each of the above aspects (entitlements, demographics, macroeconomic shifts) and the contours of govt expenditure and income to gain a better perspective on these unsustainable deficits and borrowings from the future. (to be explored)
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Reading the above and looking at the current levels of deficits and dependance on debt, it seems that governments around the world have been choosing short term fixes of deficit funding for quite a long time now, for some reason or the other, eventually reaching these high levels of debt. Returning to the opening quote, that generally, when they can, governements should be paying off debts and saving for the future, but it seems that somehow the short term reasons have been clouding this kind of long term/ generational thinking for a long time now. Different discussion forums (OECD, G7, G20), keep bringing some sort of alignment on paths to fiscal sustainability and addressing the fiscal imbalance through different transition strategies, which require positive actions & ownership of outcomes from governments to manage and reduce deficits.