In John Mauldin’s latest letter (.pdf) he takes a look at recent research from the Bank of International Settlements. The paper titled “The future of public debt: prospects and implications” covers the remarkable increase in public debt among industrial nations since the beginning of the latest financial crisis and its implications for the future. The entire paper can be found here but one table in particular got my attention.
Table 3 | ||||
Average primary balance required to stabilize the public debt/GDP ratio at the 2007 level | ||||
Over 5 years | Over 10 years | Over 20 years | Memo: Primary balance in 2011 (forecast) | |
Austria | 5.1 | 3.0 | 2.0 | –2.9 |
France | 7.3 | 4.3 | 2.8 | –5.1 |
Germany | 5.5 | 3.5 | 2.4 | –2.0 |
Greece | 5.4 | 2.8 | 1.5 | –5.3 |
Ireland | 11.8 | 5.4 | 2.2 | –9.2 |
Italy | 5.1 | 3.4 | 2.5 | 0.0 |
Japan | 10.1 | 6.4 | 4.5 | –8.0 |
Netherlands | 6.7 | 3.7 | 2.3 | –3.4 |
Portugal | 5.7 | 3.1 | 1.8 | –4.4 |
Spain | 6.1 | 2.9 | 1.3 | –6.6 |
United Kingdom | 10.6 | 5.8 | 3.5 | –9.0 |
United States | 8.1 | 4.3 | 2.4 | –7.1 |
1 As a percentage of GDP. Sources: OECD; authors’ calculations. | ||||
This table shows the average primary balance that must be achieved over a 5, 10 or 20 year time period in order to return the debt/GDP ratio to the 2007 percent of GDP levels. A primary balance is essentially the difference between revenues and total outlays before interest expense.
What caught my attention is how realistic the 2.4% primary balance required for the United States to return to 2007 debt levels within 20 years is. Since 1930, a period of 80 years, we have achieved a primary balance in excess of 2.4% of GDP in eight years, or 10% of the time. Five of these years were consecutive, from 1997-2001, during the boom years leading up to the bursting of the technology bubble.
click to enlarge
A 10% frequency doesn’t seem highly likely but it is realistic, right? It gets worse when you consider current forecasts for the next five years, 2011-2015. The average foretasted primary balance deficit is 5.1% per year. If these forecasts prove accurate it would require a primary balance surplus of, on average, 4.9% per year for fifteen years to get back to the 2.4% needed over the entire 20 year period. How many times has the 4.9% required surplus been achieved in the past eighty years? Exactly once; 6.3% in 1948.
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