Meet the Author

Owen F. Humpage |

Senior Economic Advisor

Owen F. Humpage

Owen F. Humpage is a senior economic advisor specializing in international economics in the Research Department of the Federal Reserve Bank of Cleveland. His research focuses on the international aspects of central-bank policies and has appeared in the International Journal of Central Banking, the International Journal of Finance and Economics, and the Journal of Money, Credit, and Banking. Recently, Dr. Humpage co-authored a history of U.S. foreign-exchange operations.

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Meet the Author

Michael Shenk |

Research Assistant

Michael Shenk

Michael Shenk was formerly a research assistant in the Research Department of the Federal Reserve Bank of Cleveland. His work focused on international topics and housing-market indicators.

06.30.09

Economic Trends

A Global Fiscal Crisis?

Owen F. Humpage and Michael Shenk

The financial crisis and accompanying recession have had a severe impact on government budgets, raising the specter of huge government debt burdens down the road. Large government debt burdens are not just a fiscal problem. They can become a monetary problem, since boosting inflation above the level embedded in the current interest rate on government debt is one way to trim the debt burden.

Recessions automatically trim tax revenues and pump up government expenditures for such things as unemployment benefits and other social needs. On top of these automatic effects, many governments have provided large dollops of aid to their financial sectors in response to the crisis and have undertaken substantial discretionary budget initiatives in an attempt to get economic activity rolling again.

The International Monetary Fund estimates that the financial crisis, the recession, and the associated fiscal initiatives will push the debt burden of the 10 largest developed countries from about 78 percent of GDP in 2007 to 106 percent of GDP in 2010, when a tentative economic recovery is likely. Moreover, under the IMF’s most likely scenario, this debt burden will rise to 114 percent of GDP by 2014.

Government Debt Projections

 
Percent of GDP
 2007 2008 2009 2010 2014
Advanced G-20 countries
77.6
83.4
97.7
106.4
114.1
  France
63.9
67.3
74.9
80.3
89.7
  Germany
63.6
67.2
79.4
86.6
91.0
  Italy
103.5
105.8
115.3
121.1
129.4
  Japan
187.7
196.3
217.2
227.4
234.2
  United Kingdom
44.1
51.9
62.7
72.7
87.8
  United States
63.1
70.5
87.0
97.5
106.7

Sources: International Monetary Fund, World Economic Outlook, April 2009.

To reduce their debt burdens, advanced countries need to run substantial budget surpluses, but the prospect for quickly doing so are not good. While most economists anticipate that a recovery will begin before the year’s end, many expect a long slog before economic growth returns to its potential rate. Automatic stabilizers will revert as economic growth heads back to its potential, but much of the fiscal expansion—especially in the United States—was discretionary. These items could prove difficult to unwind or offset elsewhere in the budget. Moreover, unfunded liabilities associated with aging populations in many advanced countries are likely to put increased pressure on fiscal balances.

The IMF projects that absent serious fiscal measures to trim spending and raise revenue, almost all of the advanced countries will not stabilize their government debt burdens by 2014. The outstanding debts will remain so large that their interest costs alone will propel them upward despite renewed economic growth. That’s when the inflation option could get attractive.