Deficits: Part of the Problem or Part of the Solution?


The World Bank Global Economic Prospects 2004 is now available. Of particular note is the spotlight put on China and India, who are significanty out-performing the rest of the world in economic growth this year, their economies are expected to grow at up to 8 percent and 6 percent respectively this year. Today I will post a few extracts. Here's one on the deficit situation:

But the scope for substantial further macroeconomic stimulus is rapidly dissipating. Fiscal deficits threaten to become part of the problem instead of part of the solution, especially since a quick reversal of the deficit is not anticipated. The U.S. general government budget position (including Social Security), for example, shifted dramatically from a surplus of 2.3 percent of GDP in 2000 to a deficit of 3.2 percent as of the first quarter of 2003. The Congressional Budget Office projects that the budget position is unlikely to return to surplus until 2012. In Europe, several large countries have breached the 3-percent-of-GDP fiscal deficit limits embedded in the Maastricht criteria for the common currency. And Japan has limited fiscal scope, given persistent deficits in the 6–7 percent range. Interest rates have been brought down sharply in the United States as well as in Japan, where they stand at an effective rate of zero. Following the recent 50-basis point cut in rates, Europe still has modest headroom for monetary easing should the European Central Bank choose to relax its inflation target. In fact, downward price trends in the United States and Europe have triggered concerns of possible deflation.
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