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Question of the Day
TORONTO — Wary of slamming on the stimulus brakes too quickly but shaken by the European debt crisis, world leaders pledged on Sunday to slash government deficits in the most industrialized nations in half by 2013, with wiggle room to meet the goal.
They generally sided with cutting spending and raising taxes, despite warnings from President Barack Obama that too much austerity too quickly could choke off the global recovery.
“Serious challenges remain,” they cautioned in a closing statement set for release later Sunday. “While growth is returning, the recovery is uneven and fragile, unemployment in many countries remains at unacceptable levels, and the social impact of the crisis is still widely felt,” according to the document from the Group of 20 major industrial and developing nations.
The Associated Press obtained a draft of the document that a senior G-20 official called “99 percent complete.” He spoke on the condition of anonymity because the document was yet to be made public.
Summit participants navigated a careful course between Obama, with his emphasis on growth, and fellow leaders such German Chancellor Angela Merkel who advocated spending cuts and even tax increases.
“Advanced economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016,” according to the statement. The gross domestic product (GDP) measures the value of all goods and services, and is considered the best gauge of economic health.
At the same time, the statement incorporated Obama’s cautions against pulling back government supports too quickly. “To sustain recovery, we need to follow through on delivering existing stimulus plans, while working to create the conditions for robust private demand,” it said.
The document came at the end of three days of economic summitry.
Conditions on the streets of Canada’s biggest city remained tense Sunday. Police raided a university campus and rounded up protesters in an effort to quell further violence after youths rampaged through the city the night before, smashing windows and torching police cruisers. Police said they arrested more than 500 demonstrators.
World leaders also took note of the devastating oil spill in the Gulf of Mexico. “We recognize the need to share best practices to protect the marine environment, prevent accidents related to offshore exploration and development, as well as transportation, and deal with their consequences,” the statement said.
The April 20 explosion on the BP-leased Deepwater Horizon rig unleashed the worst offshore oil spill in U.S. history. BP is London-based and the disaster has contributed to strains between the U.S. and Britain.
The G-20 statement limits the deficit-reduction goal to the most industrialized nations. It offers governments flexibility on when to start balancing their books. It does not include country-by-country goals, and it urges those in the most precarious financial positions to accelerate their plans.
European countries, in particular, have been rattled by the near-default of Greece on its government debt.
The document doesn’t endorse a bank tax advocated by Europe and the U.S. to set up a fund to pay for future bailouts. Canada, Australia and Japan, whose banks did not fail in the crisis, oppose the levy.
Instead, it says all countries should make sure taxpayers are not stuck with the bill when banks fail, and leaves it up to individual countries to decide how they want to do that. Examples include a bank tax, stiffer cash reserve requirements or other mechanisms.
Canadian Prime Minister Stephen Harper, the summit host, urged leaders to “send a clear message that as our stimulus plans expire, we will focus on getting our fiscal houses in order.” He told his colleagues they needed to walk a “tightrope” between deficit spending this year, ensuring the fragile recovery continues, and then switching to deficit reduction programs.
The G-20 includes the world’s major industrial countries — the United States, Japan, Germany, France, Britain, Canada, Italy and Russia — plus major developing nations such as China, India, Brazil and South Korea. That roster accounts for roughly 85 percent of the world’s economic output.
It would be more difficult for some countries than others to meet the new deficit targets.
The United States ran a record deficit of $1.42 trillion last year, or 10 percent of its GDP. Private economists expect the deficit will decline only slightly to $1.3 trillion this year, which would amount to 9 percent of GDP.
Obama’s budget plan from February would cut the deficit in half by 2012, as a percentage of GDP. He’s also named a commission to examine how to trim the deficit further, to 3 percent of GDP — a level economists generally view as sustainable.
Republicans have suggested it is unlikely that Obama will be able to meet his own deficit-reduction targets and say the White House has yet to put forward a credible plan. And critics complain that the deficit commission Obama set lacks the power to make Congress consider its recommendations.
Yet, the U.S. stands a generally good chance of meeting the targets, assuming a strengthening economy between now and then.
Britain is in worse shape. Its deficit this year is over 10 percent of GDP in 2010.
“For European countries with high budget deficits, especially for the U.K. with the highest budget deficit in the G-20, we have got to make our contribution to that sustainable growth by showing the world that we can live within our means,” said British Treasury chief George Osborne. In a BBC interview, Osborne said that means stiff cuts in government spending.
Britain last week put forward a tough emergency budget, raising taxes and cutting spending by levels not seen since World War II.
On the other end of the spectrum, Canada’s federal budget deficit will be less than 3 percent of GDP this year. Ottawa’s plan aims to balance the budget by 2014-15.
As he opened the final session, Harper boasted that Toronto was “home of the most solid financial sector in the world.” Its banking system was barely affected by the financial meltdown of 2008.
The deficit targets that the G-20 countries adopted had been outlined by Harper in a letter he sent to fellow leaders this month. But there were disagreements over them right through a dinner on Saturday night.
Treasury Secretary Timothy Geithner met on Sunday for the first time with Japanese Finance Minister Yoshihiko Noda and stressed the importance of the G-20’s call for strengthening rules for banks to set aside money as cushions against potential losses, according to a Treasury Department official.
Obama had urged the G-20 countries to avoid the costly mistake made during the 1930s, when countries reduced government support too quickly and ended up prolonging the Great Depression.
Associated Press writers Emma Vandore, Jane Wardell, Darlene Superville, Jeannine Aversa, Foster Klug and Martin Crutsinger contributed from Toronto.
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