The time has come for governments to start paying their bills and the Conference Board of Canada says for the global economic recovery to be sustainable, governments must strike a balance between managing this debt and maintaining some fiscal stimulus.
The Ottawa-based research organization recommends that governments around the world begin taking tough but necessary measures to get deficits and debt under control.
“Greece and other countries in southern Europe are in the most dire shape, but the United States, United Kingdom and Japan are also facing unsustainable debt burdens,” said Matthew Stewart, senior economist for the Conference Board of Canada. “If these countries fail to get their fiscal houses in order, it could result in higher interest rates and the risk of financial shocks, which would weaken or even cripple the recovery.”
Although countries such as the United Kingdom and Germany are restraining program spending and implementing tax increases, deficit ratios among the EU countries are expected to improve only marginally over the next few years.
The report says removal of temporary stimulus beginning in 2010-11 should improve the U.S. fiscal outlook over the medium term. However, a slowdown in the American economy—a risk that has increased in recent months—would exert pressure on the U.S. fiscal situation, making it more difficult for the U.S. administration to rapidly unwind its stimulus and pay down its debt.
Japan’s situation is also tenuous. Iit has the oldest population in the developed world and public debt that has increased to more than 200 per cent of GDP, the highest among developed countries.
Canada’s fiscal position remains better than most other developed countries, even considering the large deficits that governments ran up to fight the recession. If the economic recovery continues as expected and the federal government carries out its spending restraint announcements, Ottawa should be able to achieve a balanced budget by 2014-15—one year ahead of its current schedule.