The public finances of the US, Europe and China are deteriorating

In the US, the November elections have the potential to fundamentally change the nature of the federal government, its finances and even American society.

Joe Biden is a big-spending president. The Inflation Reduction Act ($370 billion at announcement), the CHIPs Act ($280 billion), $1.23 trillion in infrastructure spending, $100 billion in student debt cancellations, and massive aid packages for Ukraine and Israel have fueled the deficit increase to nearly twice America’s historical average.


Donald Trump, who has said he will extend his controversial tax cuts for corporations and the wealthy to the tune of roughly $5 trillion over the next decade, has shown himself to be a profligate president during his first term, even if that included the outbreak of the pandemic. . His 2017 tax cuts were a major contributor to the explosions in US debt and deficits.

Under Biden, the spending spree has at least kept the US economy afloat while the rest of the world struggled. Inflation is still high by historical standards, but it is cooling, and it is likely that interest rates will start to fall by the end of this year.

Trump, an isolationist and even more protectionist than Biden would be if he were to implement the policies laid out by his conservative advisers, is likely to reignite inflation while lowering economic growth. The specter of stagflation would arise abroad.

With two candidates who have shown little interest in prudent fiscal policy and a Congress bitterly divided along partisan lines, no matter who wins the November election, it is unlikely that there will be a serious effort to get government spending under control. to get the budget deficits under control and to tackle the budget shortfalls. a rising debt burden and the doubling of net interest costs – to more than $1.7 trillion and 4.1 percent of GDP – that the CBO predicts.

In France, where Emmanuel Macron called early elections after his party was embraced by Marine Le Pen’s Rassemblement National (RN) party in the European Parliament elections earlier this month, Macron’s attempt to shave 25 billion euros from the French deficit of 154 billion euros is just a sham. very modest step in the right direction. It was not enough to prevent rating agency Standard & Poor’s from downgrading France’s credit rating last month.

Le Pen has promised to increase government spending, lower the retirement age and cut VAT on fuel. It is therefore unlikely that an RN victory would result in more conservative public finances.

If France’s far-right party were to become the dominant political force, much more than just the country’s finances would change, as in the US. In fact, there would be enormous consequences for the wider Europe and the stability of the EU.

By violating EC deficit and debt limits, France, Italy, Belgium, Hungary, Poland, Slovakia, Malta and Romania could face fines for endangering the financial stability of the euro area.

However, due to the ongoing war in Ukraine and expensive European responses to climate change, short-term flexibility has been built into the EC’s rules.

Both Greece (162 percent) and Spain (108 percent) have debt ratios well above EC ceilings, but they were not highlighted here because their budget deficits have declined steadily and significantly.

The EC appears to be much more concerned about developments in public finances than about their absolute levels. If Macron’s party loses government, these concerns (and other, non-financial fears) will increase.

The US and Europe are two of the three most important economic regions in the world. The other is China, which is also experiencing some tension in its public finances.

Although central government debt levels are quite low (around 25 percent of GDP at the end of last year), Beijing raises almost all government revenues, while spending is done at the level of local and regional governments, where debt on the balance sheet is approximately 31 percent of GDP. Local government financing instruments had debts amounting to approximately 48 percent of GDP.

All told, public debt is about 116 percent of GDP, according to the International Monetary Fund.

Of course, there is also a lot of debt held by China’s state-owned banks and other state-owned or controlled entities, and heavy household borrowing has pushed the country’s total debt-to-GDP ratio above 250 percent, or about double the U.S. level.

China’s credit rating was downgraded by Fitch Ratings earlier this year largely due to the outlook for the budget deficit, which is expected to rise from 5.8 percent to 7.1 percent this year, and its impact on government debt ratios.

All three regions – the US, Europe and China – are experiencing an aging population, which translates into rising social services and healthcare costs.


In the US, for example, Medicare spending as a percentage of GDP is expected to double to 4.2 percent of GDP over the next decade. Net interest costs are rising faster than GDP growth. Without an unlikely increase in economic growth, these are not sustainable trends for the US or other economies facing fiscal deterioration.”

The pandemic has blown holes in the finances of governments around the world. Some are doing a better job of rebuilding their finances than others in an environment that has become more volatile and difficult due to wars, trade wars and relatively low economic growth rates.

China is in a special category because the authoritarian nature of its government allows Beijing to dictate abrupt changes of course, but the US will ultimately have to respond to the threats posed by the fragility of its public finances, and Europe will, if it wants remains coherent and stable, it will have to force and/or encourage its more promiscuous Member States to control their spending.

The success or failure of their efforts – if efforts are made – will have significant consequences for the rest of the world’s economic and geopolitical stability and longer-term prospects.

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