Comment on Fiscal Consolidation of G7

1,006 billion dollars. This is not the value of the GDP of a middle-income country, but the amount of resources that the United States will have to find in the coming years if they want to successfully achieve their fiscal consolidation target. According to some recent estimates by the International Monetary Fund, the US Treasury will have to consolidate its public finances to 6.2% of its GDP in the years 2014-2020. Japan will have to do even more: the adjustment will be equal to 16.1% of its GDP (829 billion dollars). Table 1 summarizes the data for the required consolidation to be carried out by the first seven world economies. Overall, they will have to raise 2,062 billion dollars to carry out the adjustment process.

Will they really be able to find this gigantic mountain of money? If yes, from where? Answering these two questions is difficult. The biggest obstacle to achieving the goal of fiscal sustainability is represented by the amount of debt in absolute terms. After the 2009 crisis, many advanced economies are now close to achieving primary surpluses. This will allow them to stabilize their debt ratios. This is good news, but it is not sufficient. The existence of massive debts reduce the potential growth and deprives the government any leeway in pursuing expansionary fiscal policies. There is no need to enter into the ongoing dispute between professor Krugman and professor Rogoff, about the correlation (or the causal link) between the level of debt and the growth rate to remind us that, sooner or later, any debt must be redeemed. This can only happen in two ways: either through the continuous generation of yearly budget surpluses (flow-based adjustment) or through a drastic debt haircut (stock-based adjustment). The first approach takes many years, while the second is more immediate but has the drawback of being politically inconvenient. Another possibility is represented by the sale of public assets, which is not very rewarding for some states which do not have many assets to sell. If governments were limited to only stabilize the level of debt would condemn their economies to decades of stagnation. Efforts to reduce debt ratios to more reasonable levels are essential. In contrast, many Keynesian economists still argue that policies to reduce the deficit and the debt should be postponed for not further depress the real economy, but they do not admit that, this way, public finances would deteriorate further and the consolidation process would only be postponed, with the aggravating circumstance that would be even more costly in the end.

From this perspective, the United States and Japan have never been able to show a serious willingness to embark on a virtuous path of improving their public finances, unlike in Europe, where despite the recessionary effects of the austerity policies, there is a very strong commitment to bring European public finances on a more sustainable path. Japan has introduced a stimulus spending package which is expected to keep the cyclically adjusted deficit well above 9 percent of GDP in 2013, more than twice the advanced economy average. The US deficit-to-GDP ratio is projected at 6½ percent in 2013, a value still very high, especially when compared to that of many European countries, definitely to a more advanced state in the recovery process.

If we look to the next decade, it is the European countries to be better positioned in terms of sustainability of public finances. The required adjustment to France is in fact equal to 2.4%, while to Italy is equal to 1, 3% and that of Germany is even negative (-1.1%). A perspective that seems to positively recognize the gigantic efforts made by European countries in recent years due to the strengthening of budgetary policies contained in the European treaties. Even Greece, the European country most affected by the sovereign debt crisis, is not in a negative position, since the International Monetary Fund calculates for her an adjustment equal to 2.4%, almost half of that required to the United Kingdom (5.4%).

If we translate all these percentages in absolute monetary values​​, we immediately realize of the size of the consolidation process. From this point of view, Japan and the United States will have to seriously take strong decisions about the consolidation strategy. Decisions that will generate, as has happened in Europe, devastating political and economic consequences. The European experience has shown how governments that engage in austerity policies pay the price of electoral defeats and that the process for consolidation has devastating side effects in terms of fall in output and unemployment rates, as a result of the increase in taxes and the reduction of the welfare state. For some emerging economies such as China, instead, the adjustment process is not required at all. For others, such as Brazil, Turkey and Russia, the values ​​are even negative, -4.2%, -1.4% and -0.5%, respectively, meaning that these economies can spend rather than save. It might just be the different stock of public resources available and the length of the consolidation process to completely redesign the geo-economic future and the wealth of nations.

Table 1 – Adjustment requirements for the major advanced economies

Country adjustment (%) adjustment  (bln $)















United Kingdom



United States



Total G7  


Source: IMF, Fiscal Monitor 2013; author’s calculations



3 Responses to “Comment on Fiscal Consolidation of G7”

SchofieldJune 14th, 2013 at 5:53 am

From a sectoral balances perspective this whole article is based on the unexamined Neo-Liberal assumption that the global economy accounted for at a macro or aggregate level can run a surplus to achieve economic growth. It can't. Even individual countries that run a trading surplus with other countries do so because other countries' governments run a "deficit". For a sovereign government with the ability to create money to have to borrow it in order to run a "deficit" is a nonsense but suits the interests of a rentier mentality.

Charley ClarkJune 22nd, 2013 at 5:46 am

By saying that there is no need to enter into the Rogoff debate on deficits and economic growth, you are saying "I don't care what the evidence says about deficits and economic growth". The theory defending the austerity case has been shown to be nonsense, and the lived experience of austerity is pain and suffering with no real deficit reduction. I don't understand neoclassical economists. When neither solid theory nor evidence supports your case for austerity and you still argue for austerity, then you are just an apologist for the rentier class. If you really believe that Greece is in a better situation than the USA, then you should put all your retirement money in Greek bonds. Good luck with that.

DiranMJuly 17th, 2013 at 1:43 am

Comments about China 'requiring no adjustment at all' show that this guy is off the cliff in his thinking. Why Europeans have generally such poor economic formation is mystery to me. The results are the World Bank labeling the EU as the weakest link in the world economy and the persistently bad economic performance of the EU with high unemployment and low growth compared to the US and Asia. In fact, the EU is the armpit of the world economy!!!

Suggest that Canegrati read some of the work of Michael Pettis on China for his education: and his FP article "Crunch Time"….

Likewise Pettis will also educate him to understand better the challenges in the EU:… and….

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Aaron Menenberg is Foreign Policy and Energy analyst, and a Future Leader with Foreign Policy Initiative. He also co-hosts Podlitical Risk (@podliticalrisk). He is a graduate student in international relations at The Maxwell School of Syracuse University. Previously he has worked at Praescient Analytics, The Hudson Institute, for the Israeli Ministry of Defense, and at the IBM Corporation. The views expressed are his own, and you can follow him on Twitter @AaronMenenberg. He welcomes questions and comments at