Sunday, May 16, 2010

Is the recession driving the debt burdens?

The synchronized global business cycle has meant that all the major economies look set to face a long period of weakness. In a recent post, Economix pointed to a graphic (from an IMF report) which indicates that the dramatic increases in public debts across the developed economies is driven mostly by the output collapse and the related revenue loss.

Of the almost 39 percentage points of GDP increase in the debt ratio, about two-thirds is explained by revenue weakness and the fall in GDP during 2008-09 (which led to an unfavorable interest rate-growth differential during that period, in spite of falling interest rates). Interestingly, the IMF report estimates that the fiscal stimulus contributed to only one-tenth of the increase in debt. Much the same story comes out from an examination of the sources of the massive $1.2 trillion US fiscal deficit.

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