Belgium on Wednesday looked to appease skittish investors in its sovereign debt by unveiling better than expected deficit figures for 2010, promising further budgetary efforts and even hinting at a solution to its long-running political crisis.
Its 2010 budget deficit was revised to 4.6 per cent from the 4.8 per cent previously forecast, mainly due to improved economic growth. The revision means that its sovereign debt now stands at 97.2 per cent of gross domestic product, below the 100.6 per cent level forecast and some way below the symbolic 100 per cent mark. It remains, however, among the highest in the European Union, behind only Italy, Greece and Ireland.
Are Bulgaria and Luxembourg unsung heroes of the global recession? Estonia has received wide praise for its fiscal position, and Poland’s economy is likewise admired for its refusal to contract. But this useful graphic from the Economist shows two additional players for the fiscal saints.
Public debt in Bulgaria and Luxembourg is between 0 and 19 per cent of GDP – a distinction shared only with Estonia. Both countries also share low deficits, as proportions of their GDP. But unlike Estonia, Bulgaria and Luxembourg enjoy below-average unemployment rates: 9.7 and 5.2 per cent respectively, compared to 19 per cent for Estonia.
European Union governments that persistently violate the bloc’s rules on low budget deficits and public debts could be denied EU financial aid under proposals unveiled on Wednesday by policymakers in Brussels.
The European Commission, which enforces the EU’s fiscal rules, also suggested that countries in the 16-nation eurozone should have to pay interest-bearing deposits into an EU fund if they ignored warnings to keep their public finances in order.
I’m not sure the coalition agreement lives up to the billing. Compared with budget plans the government has inherited from its Labour predecessor, the agreement includes no specific new spending cuts, lots of public spending pledges, copious tax cuts and a commitment to faster deficit reduction. Unless there are huge spending cuts or tax increases planned but not yet announced, far from contracting, the deficit is about to deepen.
Mr Osborne will have to announce public spending cuts of £57bn a year by 2013-14 from a non-protected budget of about £260bn – cuts of about 22 per cent. The next few months will see the government progressively coming clean about these figures, blaming its predecessor for the mess it has inherited, and softening the public up for the brutal cuts to come.
Fancy a bit of light relief after all that voting? Try to fix the UK deficit yourself with the FT’s interactive game, and see how bad the economy really is!
Fiscal woes are here to stay. Decades of discipline on public finances will be needed to bring eurozone public sector debt back within the European Union’s rules, the European Central Bank has warned.
As if determined to keep up the pressure on governments, the ECB latest monthly bulletin sets out scenarios for the debt-to-GDP ratio, according to appetites for cutting spending and/or raising taxes. Only on the boldest scenario, in which the “primary balance” (excluding interest payments) improves by one percentage point of GDP a year until 2018, does the ratio return below the 60 per cent limit within two decades. If no consolidation efforts are made, the ratio rises from 84 per cent this year to 150 per cent by 2026. Its assumptions may prove wrong, the ECB concludes, but the results “illustrate the increased risks to fiscal sustainability in the euro area”.
Gloomy stuff, but there could be some quick wins.
Analysts agree that Ben Bernanke’s prepared testimony ahead of the House Financial Services Committee this morning was largely uneventful.
“You know Bernanke did not say very much, when there is an active debate as to whether weak new home sales or Bernanke’s testimony was moving markets more. Oddly the home sales data may have even won that contest,” wrote Alan Ruskin, chief international strategist at RBS.
So what hasn’t changed?
The Federal funds rate, as Mr Bernanke and everyone else at the Fed have stated repeatedly, is likely to remain low for an ‘extended period’, even after the discount rate – the rate at which banks borrow money directly from the Fed – rose by 25bp last week.
But his testimony to Congress wasn’t limited to his written statement. Among his comments during the question and answer period:
- Bernanke on the cost of interest rates on reserves: Unless I’m mistaken, this is the first time Mr Bernanke has addressed the cost of paying interest on bank reserves. He has said previously that it will likely be the most important means of tightening monetary policy when it’s time to begin tightening, but not estimated its cost. In the hearing, he said the cost would be ‘within tens of basis points’ of increasing the federal funds rate. “[It's] not a tremendous difference.”
Is it the gunfight at the OK Corall? Or Ali vs Fraser? Or perhaps King Kong against Godzilla? Choose your own inappropriate metaphor, but today’s letters from more than 60 economists to the FT arguing strongly against major action to cut the deficit this year has clearly touched a nerve in what is perhaps the biggest issue facing the UK economically and politically for the next few years.
Following the letter by 20 economists to the Sunday Times at the weekend, today’s letters highlight the division in the economics profession between fiscal hawks and those who are more worried about the economy’s ability to restart after one of the deepest recessions of modern times.
The Bank of England governor said last month that Britain lacked “a credible plan” for cutting its £175bn deficit. But if he was hoping that Alistair Darling would announce a big new fiscal squeeze next week, he will be disappointed.
The chancellor has discarded the criticisms of Mervyn King, the Conservatives and the credit ratings agencies that he is not moving quickly enough to cut borrowing; his pre-Budget report will argue that the priority now is getting the economy moving. It may not be enough to satisfy the markets. Read more at ft.com.