The October Fiscal Monitor from the IMF is out and it provides ample analysis on fiscal adjustments and their impacts. It also has a few graphs and charts on fiscal adjustment in relation to Gini measures.
I'll try and limit myself 9 countries (for 2012) and incorporate the main constituents of the equation - namely the interest rate, the growth (differential between the two) and the primary balance contrasted with the overall balance. This provides a broader status update kind of glance at the economies in question.
Just a quick reminder that assuming the time period as fixed (so that i can get the 't' out of the equation), then:
If the primary balance is p, and the real interest rate is r, where (1+i) = (1+r)(1+pi) and
suppose x = (i-n)/(1+n) therefore x = (r-g)/(1+g) therefore 1+x = (1+r)/(1+g)
then my stock of debt at t time period is given by :
d(t) = (1+x)d(t-1) - p
where
n is my nominal growth rate between t and t-1
pi is my change in the GDP deflator between t and t-1
g is my real growth rate between t and t-1
i is my nominal interest rate in period t, paid in t, on debt stock outstanding of t-1
This is why the interest rate-growth differential matters, because holding p constant with an existing debt stock, we depend on the value of (1+x) which is essentially (1+r)/(1+g). Alternatively, the value of x is (r-g)/(1+g) and therefore, for x or 1+x to be smaller, g has to be greater than r. If the reverse is true then you have a multiplier > 1.
Some observations on the graph:
- Greece is the outlier as far as the differential is concerned. Think of high borrowing costs (high nominal i not offset by pi) and no growth (g). Japan, the US and Germany have a differential close to zero even though growth is minimal because of the safe have haven of the treasuries, bunds and jgbs.
- Italy, predictably is the only country (apart from Germany) with a positive primary balance yet negative overall balance, it's borrowing costs at the mercy of investors and it's current gross debt level being about 126% of GDP.
- The UK too, is running a primary deficit of over 5% and doesn't have a favourable differential. It hasn't suffered at the hands of investors (the BoE has control over its printing press) and its borrowing costs aren't out of control but growth is anemic at best debt levels are uncomfortably high.
- Lastly, China's gross debt stands at about 20% of GDP with a minor primary and overall deficit. Both India and China have their own internal macroeconomic imbalances and causes for concern but they still have emerging market growth rates. India's fiscal deficit is uncomfortably high which is why the government has been trying to take steps towards subsidy reform among other policy measures.
Recovery has suffered yet again and the outlook seems bleaker than it did earlier in the year. Synchronized fiscal consolidation has clearly made growth stall more than expected and external situations/scenarios (EZ crisis, China's hard/soft landing, US fiscal impasse) have left so many interconnected economies at the mercy of shockingly bad policy.
It was Dickens who wrote and Pip who said, "Whitewash on the forehead hardens the brain into a state of obstinacy". Perhaps it's time for more than a few policy makers and politicians to reflect, change direction, and ditch a dogma that does more harm than good.
I'll try and limit myself 9 countries (for 2012) and incorporate the main constituents of the equation - namely the interest rate, the growth (differential between the two) and the primary balance contrasted with the overall balance. This provides a broader status update kind of glance at the economies in question.
Just a quick reminder that assuming the time period as fixed (so that i can get the 't' out of the equation), then:
If the primary balance is p, and the real interest rate is r, where (1+i) = (1+r)(1+pi) and
suppose x = (i-n)/(1+n) therefore x = (r-g)/(1+g) therefore 1+x = (1+r)/(1+g)
then my stock of debt at t time period is given by :
d(t) = (1+x)d(t-1) - p
where
n is my nominal growth rate between t and t-1
pi is my change in the GDP deflator between t and t-1
g is my real growth rate between t and t-1
i is my nominal interest rate in period t, paid in t, on debt stock outstanding of t-1
This is why the interest rate-growth differential matters, because holding p constant with an existing debt stock, we depend on the value of (1+x) which is essentially (1+r)/(1+g). Alternatively, the value of x is (r-g)/(1+g) and therefore, for x or 1+x to be smaller, g has to be greater than r. If the reverse is true then you have a multiplier > 1.
Some observations on the graph:
- Greece is the outlier as far as the differential is concerned. Think of high borrowing costs (high nominal i not offset by pi) and no growth (g). Japan, the US and Germany have a differential close to zero even though growth is minimal because of the safe have haven of the treasuries, bunds and jgbs.
- Italy, predictably is the only country (apart from Germany) with a positive primary balance yet negative overall balance, it's borrowing costs at the mercy of investors and it's current gross debt level being about 126% of GDP.
- The UK too, is running a primary deficit of over 5% and doesn't have a favourable differential. It hasn't suffered at the hands of investors (the BoE has control over its printing press) and its borrowing costs aren't out of control but growth is anemic at best debt levels are uncomfortably high.
- Lastly, China's gross debt stands at about 20% of GDP with a minor primary and overall deficit. Both India and China have their own internal macroeconomic imbalances and causes for concern but they still have emerging market growth rates. India's fiscal deficit is uncomfortably high which is why the government has been trying to take steps towards subsidy reform among other policy measures.
Recovery has suffered yet again and the outlook seems bleaker than it did earlier in the year. Synchronized fiscal consolidation has clearly made growth stall more than expected and external situations/scenarios (EZ crisis, China's hard/soft landing, US fiscal impasse) have left so many interconnected economies at the mercy of shockingly bad policy.
It was Dickens who wrote and Pip who said, "Whitewash on the forehead hardens the brain into a state of obstinacy". Perhaps it's time for more than a few policy makers and politicians to reflect, change direction, and ditch a dogma that does more harm than good.
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