World leaders made bold pledges to cut their spiraling budget deficits but will probably fall far short of their lofty goals.
After spending massive amounts of money to rescue the global economy from the worst downturn in decades, the Group of 20 major industrial and developing nations have reversed course and promised to cut their deficits in half in terms of the global economy in just three years.
This pledge, by nations which represent 85 percent of the global economy, would represent a sea change in how the world’s major economies are handling their finances.
It could usher in sizable tax increases and massive cuts in government programs, including popular benefit programs such as Social Security and Medicare in the United States.
President Barack Obama and other leaders in their closing news conferences on Sunday insisted that they really meant what they said, sounding like the dawning of a new age of austerity was just around the corner.
There is certainly the possibility that the Greek debt crisis has scared many nations with similarly high debt burdens into doing what they can to improve their budget outlook to avoid their own Greek-style tragedy.
Greece is facing years of painful austerity measures after it was forced to accept massive bailouts from its neighbors when it could no longer meet its debt obligations.
“Other countries have seen what has happened to Greece and they have gotten worried. They are facing deficits and debt burdens that are overwhelming,” said Mark Zandi, chief economist at Moody’s Analytics.
In the United States, the issue isn’t the threat of an unprecedented default on U.S. government debt. It is the threat that foreign investors such as China, the largest holder of Treasury securities, will suddenly decide they do not want to hold as much U.S. government debt, a move that could send U.S. interest rates rising.
The deficit cutting pledge, included in the G-20 joint communique issued Sunday, certainly sounded dramatic. The developed countries promised to cut deficits in half in three years as a percentage of their total economies and said they would stabilize their total debt burdens by 2016.
For the United States and most of the other nations, that would be a remarkable turnaround, especially from the past two years, a period when deficits soared as government’s boosted spending and cut taxes in an effort to keep the 2007-2009 Great Recession from becoming a repeat of the Great Depression of the 1930s.
The U.S. deficit hit an astonishing $1.42 trillion last year, the highest in history, and analysts think it will show only a slight improvement to $1.3 trillion this year.
Obama’s budget projects the deficit will never fall below $707 billion over the next decade.
However, even these seemingly grim numbers would represent an improvement in the deficit picture that would allow Obama to meet one of the deficit targets — cutting the red ink in half by 2013. His spending plan released last February has the deficit falling from 10 percent of GDP last year to 4.2 percent of GDP in 2013, a cut of more than half.
Obama does miss the other target of getting total debt stabilized by 2016. His budget shows that the debt held by the public, which doesn’t count what is owed to the Social Security trust fund, would keep rising from 56 percent of the economy this year to 69 percent of the economy a decade from now and not stabilize by 2016, as the G-20 target calls for.
But Obama insisted in his closing news conference Sunday that his administration has a plan to meet the G-20 goals. That effort includes getting recommendations from a deficit commission due to report in December on how to trim spending further in such areas as government benefit programs.
The trouble is that Congress has shown little enthusiasm for making the tough choices on taxes and entitlement programs that will be needed to get the U.S. deficit down to 3 percent of GDP, the level economists believe would stabilize the debt burden.
And lawmakers in other countries, who also have to face voters, have shown a similar reluctance.
“The G-20 goals are very good, but history tells us it is very unlikely that they will be met,” said Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University.
Obama said he would force Congress next year to address the deficit problem, which Republicans in Congress have made a major issue and polls show is eliciting growing concern among voters.
“Next year when I start presenting some very difficult choices to the country, I hope some of these folks who are hollering about deficits and debt step up, because I’m calling their bluff,” he said.
But Obama is likely to find that lawmakers are much more willing to talk about the deficit than take the painful votes needed to do something about the deficit.
EDITOR’S NOTE — Martin Crutsinger has covered economics for The Associated Press in Washington since 1984.
Source: The Associated Press.