Weekly Business Insights from Top Ten Business Magazines | Week 295 | Shaping Section | 1

Extractive summaries of and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Week 295 | May 5-11, 2023

Governments are living in a fiscal fantasyland

The Economist | May 4, 2023

Listen to the Extractive Summary of the Article

America’s budget deficit is set to balloon as its population ages, the cost of handouts swells and the government’s interest bill rises. The Economist estimates that deficits could reach around 7% of GDP a year by the end of this decade—shortfalls America has not seen outside of wars and economic slumps. Worryingly, no one has a sensible plan to shrink them.

Governments elsewhere face similar pressures—and appear just as oblivious. Those in Europe are locked in a silly debate about how to tweak debt rules, at a time when the European Central Bank is indirectly propping up the finances of its weakest members. China’s official debt figures purport to be healthy even as the central government prepares to bail out a province. Governments are stuck in a fiscal fantasyland, and they must find a way out before disaster strikes.

Rising rates are squeezing budgets just as pressures to spend are mounting. Ageing populations mean that by the end of the decade the annual health-care and pension bill in the rich world will have risen by 3% of GDP. The figure is 2% even in emerging markets, including China, where by 2035 there will be 420m over-65s. In the West policymakers have yet to deliver on promises to spend more on defence in light of Russia’s invasion of Ukraine and tensions between America and China over Taiwan. And the whole world needs more green public spending if it is to decarbonise rapidly.  All told, the picture is forbidding.

Politicians need to get real, fast. Public debts are in danger of becoming unmanageable, especially if interest rates stay high. Every step up in borrowing hampers governments’ ability to respond to the next crisis. And there are limits to how far spending can be controlled. Politicians could dial down their promises to pensioners or ensure that their role in the green transition is not larger than it needs to be. But there is little public appetite for austerity, and spending is bound to rise as populations age. More defence spending and green investment are essential.

All this makes tax rises inevitable. And more taxation makes it crucial to raise money in ways that are friendly to economic growth.  Leaving fiscal fantasyland will be painful, and there will undoubtedly be calls to put off consolidation for another day. But it is far better to make a careful exit now than to wait for the illusion to come crashing down.

3 key takeaways from the article

1. America’s budget deficit is set to balloon as its population ages, the cost of handouts swells and the government’s interest bill rises. The Economist estimates that deficits could reach around 7% of GDP a year by the end of this decade—shortfalls America has not seen outside of wars and economic slumps. Worryingly, no one has a sensible plan to shrink them.  Governments elsewhere face similar pressures—and appear just as oblivious.
2. Rising rates are squeezing budgets just as pressures to spend are mounting.  Politicians need to get real, fast. Public debts are in danger of becoming unmanageable, especially if interest rates stay high. Every step up in borrowing hampers governments’ ability to respond to the next crisis. And there are limits to how far spending can be controlled.
3. All this makes tax rises inevitable. And more taxation makes it crucial to raise money in ways that are friendly to economic growth.

Full Article

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Topics:  Global Economy, Inflation, Interest Rate