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EconGrapher (< 20)

December 2009

Recs

9

Are Developed Nations Fiscally Sustainable?

December 29, 2009 – Comments (4)

This edition examines the fiscal sustainability of developed economies. The context is that before the crisis there were already structural problems that had caused government deficits to expand such as aging populations, growing welfare programs, lack of spending discipline, etc. Then came the crisis.

The global financial crisis required massive stimulus measures to attempt to limit the damage. For the time being it appears to have worked (beyond the scope of this article). But on the fiscal sustainability front this has taken what was already a huge problem and, without right action, could set developed nations and (through the deadly force of contagion) the world on a course to the next crisis; called 'sovereign default'.

The consequences of inaction could well be financial ruin, and when governments go bankrupt; who bails them out? In the usual format, the following 5 graphs will be examined for insights as regards this issue. At the conclusion the options for developed nations will be listed, and the implications for those reading will be highlighted.

1. Fiscal Balances: Advanced versus Emerging Economies
The chart below, from the IMF, shows data back to the 70's, through most of history the norm was deficits (so we're not really dealing with a new phenomenon, but the dynamics have changed). The history was also that developed nations tended to have lower deficits than emerging nations (greater tax revenue base, less spending required on infrastructure, less volatility of leadership, etc).

Graph 1.  [more]

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