With the US partial government shutdown dragging on, I was digging around in the OECD’s fiscal data, with a particular emphasis on the US. Of course, the shutdown itself has nothing to do with disquiet at the US fiscal position, or competing visions of the pace of adjustment back to budget balance. There were once US politicians – probably on both sides of the aisle – who cared about balancing the budget, but if there are any such people left they are either inconsequential or keeping very quiet. To the extent that fiscal issues play any role in next year’s presidential election – probably unlikely – they seem set to be conflicting visions of recklessness.
Here is a chart from the OECD comparing the core fiscal balances of the United States and New Zealand. This measure is cyclically-adjusted, covers all levels of government, and is for the primary balance (ie excluding servicing costs). There are various reasons for focusing on the primary balance, including the fact that interest costs can be heavily influenced by the rate of inflation (high in the 80s, low now), without telling one very much about the sustainability of the overall position.
It is a striking chart. Over 30 years there have only been two years when the US primary balance was higher (more positive) than New Zealand’s. All else equal, New Zealand cannot run primary deficits quite as large as those of the US, as our real interest rates are typically higher than those in the United States.
But what of public debt? In the early 1990s, when this particular debt series starts, the net government debts (per cent of GDP) in New Zealand and the United States were very similar. But not now.
And the US situation is seriously understated in this chart, because of the large unfunded public service pension liabilities that aren’t included in the debt numbers. There is nothing remotely similar (small GSF liabilities only) in New Zealand.
The US isn’t alone (and one could mount an argument that the US is better placed to cope with higher public debt than many advanced countries as it still has a faster population growth rate than most). Here are some of the G7 countries for the same period
Germany is little changed (point to point) and Canada has managed a large reduction.
I don’t take much comfort from the current low level of interest rates – either they are low for a reason (eg lower productivity growth, lower population growth) or they will eventually “return to normal”, resulting in a heavy servicing burden.
Perhaps the thing I found most interesting was this chart, using OECD data for net government liabilities as a per cent of GDP and the OECD cyclically-adjusted primary balances. One might have hoped that there would be some relationship between the two – countries with very high debts, now running decent primary surpluses, and perhaps countries with very low debts running modest deficits.
But, in fact, on this simple bivariate chart there is no relationship at all (the US is the dot at the very bottom of the chart, while Greece – surpluses – and Japan – deficits – are the two countries furthest to the right).
I wouldn’t read too much into the relationship. What is captured in the debt numbers does vary across countries (see, eg, the pension point I noted earlier), as do the demographics (eg Japan now has a falling population), and the external constraints (eg Greece), but I found it a little sobering nonetheless. There is a sense that, at least in some countries, the old self-correcting disciplines appear to have weakened considerably.
But they probably haven’t disappeared altogether, which brings us to what should be the biggest area of concern in the next few years. When the next serious recession comes, there is little conventional monetary policy leeway in most countries (even in the US, 300 basis points less than going into the last recession), and not one of those G7 countries in the chart above has made any significant progress in rebuilding the public sector balance sheet. In fact, the two largest OECD economies – the US and Japan – not only have high debt, but are also running some of the largest structural deficits, at a time when in both countries the unemployment rate is near record lows.