Economic News/Trends and Analysis — August 27, 2010

GOVERNMENT DEBT POSES RISK TO GLOBAL RECOVERY - AND CANADA IS NOT IMMUNE TO EFFECTS

www.conferenceboard.ca

OTTAWA, Aug. 27 /CNW/ - Canada's relatively healthy fiscal position - especially at the federal level - stands in sharp contrast to the red ink that other developed countries continue to spill on their balance sheets.

For the global economic recovery to be sustainable, governments around the world have to strike a balance between restoring investor confidence that they can manage their debt burdens and withdrawing their fiscal stimulus spending too quickly.

In the latest publication outlining lessons from the recession, The Conference Board of Canada recommends that governments around the world begin to take tough but necessary measures to get deficits and debt under control.

"Now the time has come for governments to start paying the bills," said Matthew Stewart, Senior Economist. "Greece and other countries in southern Europe are in the most dire shape, but the United States, United Kingdom and Japan are also facing unsustainable debt burdens. If these countries fail to get their fiscal houses in order, it could result in higher interest rates and the risk of financial shocks, which would weaken or even cripple the recovery."

Although countries such as the United Kingdom and Germany are restraining program spending and implementing tax increases, deficit ratios among the EU countries are expected to improve only marginally over the next few years.

At first glance, the removal of temporary stimulus beginning in 2010-11 should improve the U.S. fiscal outlook over the medium term. However, the risk of a slowdown in the American economy has increased in recent months, which would put pressure on the U.S. fiscal situation. The current economic risks make it more difficult for the U.S. administration to rapidly unwind its fiscal stimulus. In addition, the United States will have to deal with the effects of an aging population (the share of the population over 65 is expected to rise from 13 per cent today to 21 per cent in 2030). Although the U.S. population is not aging as fast as that of many other developed countries, this demographic shift will put pressure on health and social security expenditures.

Japan's situation is also tenuous. First, it has the oldest population in the developed world. Second, since the financial crisis hit, Japan's public debt has increased to over 200 per cent of GDP, highest among developed countries. Such debt levels cannot be sustained indefinitely, especially with an aging population.

Canada's fiscal position remains better than most other developed countries, even considering the large deficits that governments ran up to fight the recession. If the economic recovery continues as expected and the federal government carries out its spending restraint announcements, Ottawa should be able to achieve a balanced budget by 2014-15—one year ahead of its current schedule.

Canada's provinces, however, are facing structural deficits and will have a difficult time restoring balanced budgets. The primary cause is rising health-care costs, which already consume more than 40 per cent of every provincial dollar, and spending increased by an average of more than seven per cent per year over the past decade. Facing these pressures, the optimal solution to this challenge is to improve productivity growth in the health sector.

The publication, Lessons from the Recession and Financial Crisis - Lesson 8: The Fiscal Bills Will Have to be Paid, is the final one in the Conference Board's series. The reports focused on the different aspects - such as the financial sector, labour markets, public policy, fiscal policy and trade - and drawn key lessons for the world and for Canada that deserve priority discussion among policy makers and business leaders.

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