G20 Meeting's Deficit Goals Are Meaningless

by: Daryl Montgomery

The G-20 met this weekend and set a goal that member countries should cut their deficits in half by 2013. The agreement also calls for G-20 countries to start reducing their deficit to GDP ratio by 2016. Even with such easy to reach targets, success is by no means guaranteed.

For some reason the G-20 recently woke up and realized countries can't continue to forever spend a lot more than their income from tax receipts. Some of them have been doing just this for many decades at this point. The statement released from the meeting said: "Sound fiscal finances are essential to sustain recovery, provide flexibility to respond to new shocks, ensure the capacity to meet the challenges of aging populations, and avoid leaving future generations with a legacy of deficits and debt." So at least ten years after the horse has left the corral, the G-20 now wants to close the gate... but not all the way.

The original proposal for cutting deficits in half was changed from would to should because Japan, the U.S. and India objected. No one actually seems to think that Japan will be able to accomplish this goal. Japan is the most indebted major country on earth with a debt to GDP ratio reaching over 200% this year. Interestingly, the long-term budget projections of the Obama administration are for a deficit of $778 billion for 2013, which would be less than half of the $1.6 trillion projected budget deficit for 2010. The 2013 figure is still almost double the biggest deficit prior to the Credit Crisis however. It also assumes robust GDP growth and minimal inflation during the next few years. Another recession or rising inflation could easily move the U.S. deficit numbers back to well above a trillion dollars.

European markets were up on the news today and the U.S. market is rallying slightly as well in morning trade. It should be clear to the markets that world leaders are not really serious about reducing government spending. Although, the markets might be worried that even small spending reductions could turn the global economy back down and risk another recession - assuming the first recession actually ended, that is.

Disclosure: None