Nov. 25 (FT) - Fiscal stimulus was the economic tool, so long disparaged by the policymaking community, that came into its own during the economic crisis, playing its part alongside monetary easing and bank bail-outs in warding off a depression.
But the result of fiscal stimulus in almost every Group of 20 economy has been the rise of deficits to levels never seen in peacetime, debt so high there is not the ammunition to fight another economic war and a bill to clean up the mess that will be felt by taxpayers for a generation to come.
The latest estimates from the International Monetary Fund show that advanced countries’ deficits averaged 1.9 per cent of national income before the financial crisis started in 2007. This year they are expected to hit 9.7 per cent, followed by 8.7 per cent in 2010.
Public sector gross debt is expected to explode from an average across advanced economies of 78 per cent of national income in 2007 to 118 per cent in 2014.
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The problem for advanced economies is that plans for a great fiscal consolidation are needed at the same time as they are expected to cope with the retirement of the postwar “baby boomer” generation.
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The UK has records on government borrowing and debt stretching back to 1691. The expected 50 percentage point rise in the debt-to-national-income ratio is similar in proportion to that experienced during the many wars Britain fought in the 18th century and is the biggest peacetime explosion of government liabilities.
In cash terms, the government expects to borrow more in 2009 and 2010 than the entire borrowing of centuries of British governments between 1692 and 1997.
The pressure mounted this week when Mervyn King, the Bank of England governor, reiterated his view that official plans to reduce the deficit by half over the next four years were insufficient and not credible.
Instead, he called for “something where a really significant reduction in deficits to eliminate a large part of the structural deficit should take place over the lifetime of a parliament”.
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Whatever happens, people in Britain will have to get used to paying much more for their public services and receiving much less.
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