The financial media put a positive spin on a joint statement Sunday by the wealthiest members of the Group of 20 countries that they would halve their deficits by 2013 and stabilize their debt burdens by 2016.
In the words of the Wall Street Journal’s lead story, the announcement was “a signal to international markets and domestic political audiences” that the G-20 countries “are taking seriously the need to wean themselves from stimulus spending.” Wrote the New York Times: “The action … signaled the determination of many of the wealthiest countries … to now emphasize debt reduction. And it underscored the conviction of European nations in particular that deficits represented the biggest threat to their economic stability.”
What both newspapers neglected to mention is that the goals require virtually no change in U.S. fiscal policy in the near term and only modest changes by the second half of the decade - at least if you believe the 10-year budget forecast prepared by the Obama administration. For all practical purposes, President Obama could have announced, “The Europeans can do whatever they want. We’re not budging from the status quo.”
In its 2011 budget summary, submitted Feb. 1, the Office of Management and Budget (OMB) estimated that the deficit this year (fiscal 2010) would amount to $1.556 trillion. The estimate for 2013 was $766 billion. Mr. Obama expected to cut the deficit in half through strong economic growth and by freezing discretionary non-security spending for three years, beginning 2011, an initiative he announced in his January State of the Union speech. If Mr. Obama’s budgetary forecast pans out, he can meet the first of the G-20 goals without making any change in budgetary policy.
What about the promise to “stabilize” debt/GDP ratios by 2016? The ratio of the national debt to the size of the economy is widely regarded as a benchmark of a nation’s ability to carry the debt. Once again, there is less to Mr. Obama’s commitment than meets the eye.
Mr. Obama’s 10-year forecast shows the ratio of public debt (which excludes debt owed by the Social Security and Medicare trust funds, the Federal Reserve Bank and other federal agencies) shooting up from 62.9 percent in 2010 to 70.7 percent in 2013 and then hitting a plateau and climbing gradually for the rest of the decade. The debt/GDP ratio will nudge up from 72.0 percent in 2015 to 72.7 percent in 2016, the G-20’s target year.
Would an increase in the debt/GDP ratio of less than 1 percentage point constitute “stabilization?” One could argue that, like horseshoes and hand grenades, it lands close enough. As a practical matter, no one remembers G-20 goals articulated six years previously, so voters will not be holding Mr. Obama politically accountable for hitting that benchmark.
On the other hand, the bond vigilantes who set the interest rates on sovereign debt have longer memories. In the end, they will have as much to say about the future of U.S. deficits as Mr. Obama, Congress or the Federal Reserve.
When the total national debt (public and private) exceeds $13 trillion, as it does today, the interest on the national debt becomes one of the largest and most volatile components of federal government spending. Back in February, OMB projected that interest payments on the debt would increase from $188 billion this year to $840 billion by 2020. Of course, that assumes that interest rates remain stable. Ten-year Treasury notes, expected to yield 3.9 percent on average this year, are budgeted never to rise above 5.2 percent over the next 10 years. Given the fickle nature of interest rates, that assumption is a colossal leap of faith.
To carry out his commitment to the G-20, Mr. Obama will have to restrain the worst impulses of a Congress inclined to address every social or economic problem with a new round of spending. Also, he will have to keep a tight lid on the newly enacted Patient Protection and Affordable Care Act - which he asserted would reduce federal spending - even as many of the fiscal claims and assumptions made about the landmark legislation appear to be unraveling.
Finally, Mr. Obama will have to do everything he can to reassure the financial markets that he means business. Voters and journalists may not see through the nuanced language of official pronouncements, but you can rest assured that bond investors will. And if they think Mr. Obama cannot keep his budgetary promises, their skepticism could become a self-fulfilling prophecy.
James A. Bacon is author of the forthcoming book “Boomergeddon” and publisher of the blog by the same name.