If you are awake you will realize that the CONgress was supposed to consider the 2011 budget in April of this year. The budget proposal was not even presented and as of this writing, no proposal is on the table to be even considered. The reason is the real mess that must be dealt with in the current budget. This is not however an issue unique to the US.
Each of the G7 are facing challenges unlike any dealt with in the past, including D1. If you have been following the political process in the UK, each of the parties discussed the need for austerity measures in the UK, but they all understated the problem by at least 75% because of the fear of the public’s reaction to the truth.
The International Monetary Fund printed the Cross Country Fiscal Monitoring Report on May 14 and it contains both the definitive and astonishing analysis of just how bad it is really going to get and in my estimation it contains a lot of happy talk. For example, it states that the US composite debt will exceed 100% of GDP by 2015. We were at 90% of GDP this month, so I believe we will exceed 100% by 2011.
Some of the highlights of the report include that while global activity is rebounding faster than projected earlier, the fiscal outlook is not improving commensurately. In most advanced economies, fiscal developments are still dominated by the need to boost aggregate demand. The average gross general government debt-to-GDP ratio for advanced economies is projected to rise from almost 91 percent at end-2009 to 110 percent in 2015, bringing the increase from pre-crisis levels to 37 percentage points. Public debt in advanced economies is also rising as a ratio of household financial wealth, following decades of relative stability.
Government financing needs remain exceptionally high in most advanced economies. The supply of government securities will also be affected by the eventual unwinding of large positions taken by some central banks. Since mid-2009, average government debt maturities have shortened. Yields on government securities in most advanced economies remain relatively low, but spreads have risen sharply in some countries, reflecting concerns about the fiscal outlook.
In the US, fiscal adjustments are required in the 6% of GDP range, which is considered high and very difficult to achieve. The budget proposal includes a 3-year freeze on non-security discretionary funding, requiring the financial services industry to fully pay back the costs of the TARP, allowing the 2001–03 tax cuts for households earnings more than $250,000 to expire, broadening tax base for corporate and upper-income taxpayers, and eliminating funding for inefficient fossil fuel subsidies. By 2014, the deficit is projected to reach 3.9 percent of GDP.
The enacted health care reform is projected by the CBO to lower federal deficits by US$143 billion by 2019, however many believe the inverse to be true. The administration has created a fiscal commission to identify further savings with the goal of achieving primary balance by FY2015 and achieving long-run fiscal sustainability.
In this context, while a widespread loss of confidence in fiscal solvency remains for now a tail risk, its potential costs are such that the risk should not be ignored. Even in the absence of such a dramatic development, without progress in addressing fiscal sustainability concerns, high levels of public indebtedness could weigh on economic growth for years. This issue of the Monitor presents new evidence on the links between debt and growth: it suggests that based on current projections, if public debt is not lowered to pre-crisis levels, potential growth in advanced economies could decline by over ½ percent annually, a very sizable effect when cumulated over several years.
Even as the global economy improves, fiscal balances in the advanced economies are, on average, worsening. While World Economic Outlook projections for 2010 output growth in the advanced economies have increased by a full percentage point since the last issue of the Monitor, updated projections in Section I of the Monitor show that after discounting for reduced financial sector support operations, both headline and cyclically adjusted (CA) fiscal deficits in these countries will increase in 2010—relative both to the 2009 outturn and to projections made six months ago.
Based on current likely policies, the advanced economies will continue to run sizable primary deficits over the medium term, leading the average general government gross debt ratio—which has already ballooned by close to 20 percent of GDP since the onset of the crisis—to rise by a further 20 percentage points by 2015, reaching about 110 percent of GDP. The outlook is more favorable among emerging economies, where the CA fiscal balance is expected to improve this year relative to last.
Even among these economies, however, the projected improvement in the CA balance this year is barely half that projected in November. Over the medium term, these economies continue to be expected to run primary deficits. As long as the interest rate-growth differential stays favorable for them, debt ratios should stabilize or decline. However, these economies will still be exposed to interest rate and growth shocks, including as a result of fiscal spillovers from advanced economies. The fiscal outlook is also improving in low-income economies relative to last year but, again, at a slower pace than expected six months ago. These developments are occurring amid heightened market sensitivity to variations in fiscal performance across countries.
Section II shows that many countries will be facing historically high financing requirements this year making them especially susceptible to market pressures. Events in Europe are providing the clearest demonstration of the increased attention being paid by markets to differences in underlying fiscal conditions across countries, as borrowing conditions now vary across euro area members to an extent that would have been unimaginable in the recent past. In this environment, the costs of policy missteps, or of a perception of a lack of preparedness, would be high. Many countries face large retrenchment needs going forward.
Section III provides updated estimates of the adjustment in the primary CA balance needed to lower gross general government debt below 60 percent of GDP by 2030 in advanced economies: the estimate is high—8¾ percentage points of GDP on average, about ¾ of a percentage point more than in the last issue of the Monitor—but hides important differences across countries, with many of the larger economies confronting above-average adjustment needs. The task is even more difficult than it appears from the headline numbers, as many countries are projected to face increases of 4 to 5 percentage points of GDP in spending for health care and pensions over the next two decades.
The measures needed to address these spending pressures will have to be undertaken in addition to those required to achieve the targeted improvement in the primary balance. The adjustment needed to restore debt to prudent levels (40 percent of GDP) in emerging economies is significantly smaller, at 2½ percentage points of GDP. Here too, however, there are important variations across countries.
To date, few countries have made significant progress in exiting from fiscal stimulus, and where countries have announced deficit reduction targets, details about the measures underlying adjustment are often lacking. Many of those that have made progress were facing acute financing pressures that made delay infeasible. The optimal timing of stimulus withdrawal will vary depending on macroeconomic and fiscal conditions.
Some countries with weaker fiscal credibility are already facing market pressures, and should tighten fiscal policy this year. An early tightening is also needed in countries facing a rapid recovery. Other countries can wait until 2011. However, all countries should introduce structural measures now to strengthen their medium-term fiscal trends.
So what does this all mean?? We are really screwed. First, one only has to watch California over the next two or three months to understand how badly we are going to take it in the shorts. Governments have only two choices in dealing with these facts. Tax more and give much less in services. For the most part, giving less comes in terms of social support programs, education, and infrastructure. So be prepared to have Granny move in, buying an SUV to navigate the potholes, and brush up on your home schooling techniques.
Of course this is only true if our governments act appropriately and quickly. With that be as likely as pigs flying, I would suggest simply learn to live and survive on your own period. Food, security, and infrastructure is all up to you as an individual. Now that’s the truth. Don’t believe me? Ask the Greeks oh say about September.