Are balanced budgets still necessary in the fight against global recession and poverty?

Nov 11, 2010

post prepared by Andy Wynne of www.idilmat.com

Most OECD countries are now running significant budget deficits in an attempt to ensure a rapid end to the global recession.  The Managing Director of the IMF, Dominique Srauss-Khan, praised the G20 countries for adopting the fiscal stimulus that was needed, whilst warning that more may be required. The IMF appears to be taking contradictory positions with governments who are adopting budget deficits in order to reflate their economies.  This is being welcomed in the case of the industrial world, but still being discouraged in countries which have turned to the IMF for support.

However, the risks of a prolonged recession or depression remain significant. In March, the Wall Street Journal asked about 50 economic forecasters for their views. Around 55 per cent predicted an L-shape, or a prolonged recession, a further 20 per cent suggested a depression (a reduction in output per person of more than 10 per cent) was the most likely outcome.  In this situation, what is needed is a concerted effort by all counties in the world to push-start the global economy.

Despite this, the IMF seems to be stuck in the old school of thought that balanced government budgets are one of the most important pre-conditions for its support.  All nine standby agreements negotiated since last September have required spending cuts.  Ukraine has had to battle with the Fund over public spending cuts, despite the fact that its GDP is expected to fall by 9 per cent this year and it has a low public debt.   Pakistan is struggling with a Taliban insurgency in its North West Frontier Province in addition to the usual problems of developing countries which need a healthy and well educated work-force to be able to compete when the economic up-turn eventually comes.  A moderate budget deficit would enable both of these challenges to be confronted more effectively.

The economic histories of the US and the UK over the last sixty years demonstrate that high levels of government debt with a following economic boom do not appear to be a handicap and may in fact be beneficial.  Both of these countries had government debts of over 100% of their GDP in the late 1940s, but this was followed by one of the most sustained economic booms either country has experienced before or since.  In the US the Federal debt alone (excluding state or local government debt) reached over 120% of GDP in 1946(1) and in the UK Government debt peaked at nearly 250%(2) at around the same time.  The sustained international economic boom of the 1950s and 1960s meant that these levels of debt were sustainable, could be accommodated and were eventually repaid.

The IMF should take a consistent view of government deficits in the current climate.  If these are to be welcomed in the case of the governments of industrial countries they should also be accepted in The emerging nations.  Otherwise southern governments could see this as another example of northern governments saying “do as we say, not as we do”!

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