Looking at some fiscal data

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.

us and nz fiscal

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.

us and nz debt

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

g7 debt

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.

net debt and primary bal

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.

 

 

10 thoughts on “Looking at some fiscal data

  1. The case of Japan is curious. Despite 0% or negative interest rates plus three rounds of QE, they haven’t been able to meaningfully inflate the economy. Does this not show the limits of monetary policy effectiveness? (ie. interest rates only mean anything if people are willing to borrow). Contrast to the US, where monetary policy gave way to fiscal policy (eventually) with a relatively quick economic recovery post-GFC and low unemployment today (although admittedly unemployment rates alone are a narrow measure of productive labour usage).
    Greece and Japan don’t seem to be good comparisons because Japan can buy anything for sale in Yen (including labour, financial assets etc) whereas Greece must accumulate or borrow (from ECB or IMF or China) enough Euro’s before it spends on any Fiscal programs, hence the mass unemployment and social problems associated.

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  2. Happy New Year Michael

    This is a bit of a tenuous link with your article. But over the summer I took a break from my usual writing on housing and urban development matters and looked at hydrogen vehicles and ‘grid scale batteries’ in the form of pumped hydro.

    It seems to me that grid scale batteries could provide the electricity market with public good benefits from security of supply. So it could be a beneficial activity for the government to enable. Assuming it is beneficial, the question I am not sure about is how best to structure the debts? Should it go on the government books, the power generating companies books or on the books of a special purpose vehicle?

    View at Medium.com

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    • Trains do not work because the density is too low. As a result costs can’t be recouped through public use and have to be heavily subsidised by the taxpayer.

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      • New higher density areas around new rapid transit stations can be built. Rapid transit operators can take an entrepreneurial/commercial approach like in Japan. Parking and road spaces can be correctly priced to prevent the subsidy of cars -which is the chief competitor for rapid transit. Do this and affordable housing around rapid transit is possible with less subsidy than what the private motorcar has received.

        Check out the comment section on this Greater Auckland article for further discussion.
        https://www.greaterauckland.org.nz/2019/01/17/the-causes-and-economic-consequences-of-rising-regional-housing-prices-part-3/

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      • To run a system like they have in Tokyo, perhaps we need to first get our population closer to their 123million people. We need to ignore our safety standards and allow 2/3 storey length escalators that people can run up and down trip fall and die/injured without recourse to the building owner.

        We also need a charging system that makes the injured in an accident on the tracks responsible for their own accident if they fall onto the rail tracks and cause delays. If they die then their families inherit the liability. We will then have a working Japanese Rail model.

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  3. …on response to the next downturn, I guess with the media debate over the likelihood of a US recession ‘soon’, was wondering what your best guess was?

    seems in the era of (relatively) independent central banks with floating fx rates, recessions come via an oil/cost shock or a ‘credit crunch’ / some form of financial imbalance unwind. Granted, you can never pick when and why the cycle might turn but are you in the ‘expansions don’t die of old age’ camp?

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    • I’m ambivalent about the “expansions don’t die of old age” line. It may be difficult to prove otherwise statistically, but that doesn’t tell us much – in reality the sample size is very small. What is true is that things that can give a particular impetus to headline economic growth often don’t last forever – one could think of immigration surges, or Canterbury rebuilds, or big fiscal stimuli – and excess capacity does get used up too. In the US context, thrown in what are now quite substantial rises in short-term interest rates (mirrored almost nowhere else in the world) and there is good reason for caution, and a sense of heightened vulnerability. But in both NZ and the US those sorts of factors alone might not take me beyond a 20% probability of a recession in the next year (statistically about the norm). What worries me much more is the sharp slowdown evidently underway in China, with little sign that the authorities are now (a) willing and (b) able to quickly and fully reverse that downturn with new stimulus measures, and the situation in Europe/EU/UK. Euro-area data are already weakening, and the Brexit situation will be increasing business uncertainty in both the UK and the rest of the EU. Throw in the European Parliament elections, and the limited capacity of most euro-area states to do much about renewed downturns and there is the potential for major problems (perhaps not directly causing a recession, but potentially greatly exacerbating it.

      I mostly don’t do forecasts, but there are a growing number of uncomfortable straws in the wind. I wouldn’t. for example, want to be a NZ exporter reliant on demand relating to Chinese construction.

      (Re credit crunches etc, at the margin don’t rule out the potential impact of the RBNZ’s very aggressive stance on bank capital.)

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      • There is increasing upward pressure on rents. This year looks like even more so after Taxinda Ardern’s Labour government has been busy frightening landlords with Ring Fencing tax losses and Capital Gains Tax on top of the 5 Year Bright Line Tax. With insulation, central heating, health and safety and everything else that landlords are being made responsible for. Landlords are just selling up and the end result of course is much higher rents as rental stock falls. Hurrah. Nice textbook model study on how to force rents up by a Labour Government.

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