A Hidden Fiscal Crisis by Laurence J. Kotlikoff published by IMF (9/2010).
“Even as the United States experiences continuing fallout from a terrible fi nancial crisis, a more alarming fi scal problem looms. The world’s largest economy faces a daunting combination of high and rising costs for health care and pension benefi ts and constrained sources of revenue that will put enormous pressure on its fi scal soundness.
So far, the markets seem to be focusing on U.S. official government debt relative to its gross domestic product (GDP). That number stands at 60 percent, roughly half that, say, of beleaguered Greece. Consequently, the financial wolves are circling Greece, not the United States—driving up yields on Greek securities and driving down yields on U.S. treasury securities.
But the debt-to-GDP ratio is not a useful guide to a country’s true fiscal position. Because of something economists call the labeling problem, every dollar a government takes in and pays out can be labeled in an economically arbitrary manner. So what is reported as the size of a deficit or surplus is independent of a country’s actual underlying fiscal policy (see box)…”
How Grim a Fiscal Future? by Mark Horton published by IMF (9/2010)
“The abrupt deterioration of fi scal positions in advanced economies, emerging markets in central and eastern Europe, and elsewhere has been a key consequence of the global fi nancial crisis. These large budget defi cits have caused a sharp rise in public debt in advanced economies that likely will continue through the next fi ve years, pushing government debt well above levels seen at any time since the end of World War II (see chart).
Sharply elevated deficit and debt levels may well place pressure on interest rates and undermine economic growth in these economies and could spill over to other emerging and developing economies. Financial markets have become increasingly unsettled both by the surge in debt and by uncertainties about future taxation and expenditure policies, particularly in Europe. To preserve the recovery, markets must be reassured. In the short run, policymakers face a crucial dilemma. If they consolidate too soon—that is, they take actions to reduce budget deficits in the near term—they could kill the recovery. But inaction or policy mistakes could lead to concerns about further debt accumulation and ultimately reignite a crisis…”
