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World Leaders Pledging to Reduce Global Deficits

Sunday, 27 Jun 2010 02:54 PM

 

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World leaders on Sunday endorsed a bold pledge by rich nations to slash budget deficits in half in three years despite President Barack Obama's concerns that cutting stimulus spending too quickly could stall the global recovery.

The deficit-cutting goal was outlined in a final statement from the top 20 industrial and developing nations at their weekend summit. The Associated Press obtained a copy before its official release.

Canadian Prime Minister Stephen Harper, host of a summit, said it was critical that the countries "send a clear message that as our stimulus plans expire, we will focus on getting our fiscal houses in order."

The deficit pledge would mean cutting the red ink in half within three years and getting total debt stabilized by 2016.

"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 measures the value of all goods and services and is the broadest gauge of economic health.

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.

Harper told the leaders that 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 conference, which followed two days of discussions among the older G-8 attracted protesters unhappy with economic globalization. The demonstrations turned violent on Saturday as protesters torched police cruisers, hurled bottles at police and smashed windows with baseball bats and hammers. Arrests topped 500 by Sunday.

The deficit targets that the G-20 countries adopted had been outlined by Harper in a letter he sent to fellow leaders this month.

Harper's proposal stood in contrast to the priorities Obama laid out in a competing letter. Obama 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.

But in the discussions in Canada, it was clear that Obama's view was in the minority as country after country stressed the need to reduce deficits.

Many nations are worried about the example of Greece, which fell into a financial crisis this year when financial markets became convinced that it was about to default on its government debt.

In a bow to U.S. concerns, the statement cautioned that efforts by several nations to trim deficits could end up slowing the recovery. "There is also a risk that the failure to implement (budget) consolidation where necessary would undermine confidence and hamper growth," it also said.

The G-20 agreement provided support for what many individual countries are already doing. Britain, for example, last week announced a tough emergency budget, raising taxes and cutting spending by levels not since World War II.

The United States ran a record deficit of $1.42 trillion last year, or 10 percent of the overall economy as measured by the GDP. Private economists expect the deficit will decline only slightly to $1.3 trillion this year, which would amount to 9 percent of GDP.

The U.S. also supports tighter budget discipline, although Republicans says the White House has yet to put forward a credible plan.

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.

The G-20 endorsed the Obama administration's effort to win congressional approval for the most sweeping overhaul of U.S. banking rules since the Great Depression. It backed the European Union over its plan for stress tests of major banks, to ensure they can withstand a surge in bad debt stemming from the red ink woes of many European nations.

The G-20 leaders pledged to reach agreement at their next summit in Seoul, South Korea, in November on new capital standards for banks. Higher capital standards are seen as a way to prevent banks for being caught without adequate resources against losses, seen as a major factor triggering the 2008 financial crisis.

On the issue of taxing banks to pay for future bailouts, the G-20 statement stressed the responsibility of the banking sector to shoulder the cost of any repeat crisis.

"We agreed that the financial sector should make a fair and substantial contribution toward paying any burdens associated with government intervention, where they occur, to repair the financial system or fund resolution," the communique said.

Endorsement of a bank tax comes in spite of the opposition by a number of countries including Canada, Japan and Australia.

But the communique provided room for a "range of policy options" that could be adopted by countries on this front, including the pursuit of a financial levy.

Britain last week announced a levy on bank profits from January 2011 to raise about $3 billion per year. France and Germany have also agreed to similar levies.

Mindful that open signs of dissension could worry financial markets, the G-20 leaders have sought during their weekend talks to minimize their differences.

French President Nicolas Sarkozy told reporters that Obama "clearly talked about the risks of debt and deficit" in the U.S.

U.S. Treasury Secretary Timothy Geithner said world leaders understood they must work together to make sure the global recovery stays on track.

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