Hard on the heels of the global financial crisis (which, though stabilized, is far from resolved) comes the global fiscal crisis. Since Dubai World, Dubai’s state-owned investment vehicle, defaulted on servicing its debt in November 2009, the world has been wondering who’s next.
Greece is facing an economic crisis, with a budget deficit of around 12 percent of GDP and public debt expected to exceed 130 percent of GDP by 2011. Japan’s debt already stands at 200 percent of GDP. In the United States the budget deficit has risen to around 11 percent of GDP, and debt is rapidly approaching 100 percent of GDP. In the United Kingdom, the budget deficit stands at over 13 percent of GDP, and debt, which in 2007 was under 50 percent of GDP, is rising rapidly towards double that figure.1
The global financial crisis has certainly exacerbated the fiscal crisis, partly by triggering a recession that has shrunk tax revenues and expanded welfare payments, and partly, in some countries, by prompting huge government bail-outs of failing financial institutions. But even without the financial crisis, some kind of fiscal reckoning was on the way.
Public spending has been rising since the turn of the millennium in several English-speaking democracies, often undoing successful fiscal consolidations in the 1990s. In the United States, Britain and New Zealand, budget surpluses were irresponsibly turned into deficits at a time when economic growth was generating steady annual increases in tax revenues. In the Euro area, public spending is forecast by the OECD to be 51 percent of GDP this year. The OECD’s figure for New Zealand, 46 percent, is not much lower. Even in Australia, where the Howard government of 1996–2007 ran a budget surplus every year and eliminated the federal government’s debt, government spending—while much lower than New Zealand’s as a share of the economy—is projected to be nearly 37 percent of GDP this year.
The fiscal outlook for New Zealand is a major concern.
