- Underlying causes of current sovereign debt crisis were present long before the onset of the global financial crisis of 2007-2008
- Aging populations and an interconnected ‘global’ economy will compound the deficit challenge over the medium to long-term
- KPMG proposes comprehensive fiscal sustainability framework to meet long-term financial challenges
The roots of the current sovereign debt crisis do not solely lie in the global financial crisis of 2007-2008, according to a new report, entitled Walking the fiscal tightrope: a fiscal sustainability framework for government, from KPMG International.
KPMG research of the fiscal policy settings of 19 of the G20 economies reveals that levels of government debt were already reaching their limits long before the global financial crisis hit, and the impact of aging populations and the interconnected global economy require long-term policies to prevent debt conditions from worsening.
KPMG report finds that those countries with high levels of gross debt prior to the start of the crisis - in excess of 60 percent of gross domestic product (GDP) - have been the most limited in their ability to adequately respond to the issue and are now facing a longer and more difficult path back to sound fiscal sustainability.
“Our research suggests that, in most cases, short-term thinking and political expediency tend to trump considerations of long-term fiscal sustainability,” said John Herhalt, KPMG’s Global Head of Government and Infrastructure, and a partner in the Canadian firm. “The only way to truly turn the corner on the sovereign debt crisis is for governments to commit to sustained fiscal policy implementation across the political cycle, a strategy that the so-called Fiscal Compact in the euro zone intends to create.”
While the research indicates that these deep-seated issues will not likely disappear any time soon, it also notes that the slow outlook for world economic growth in the near-term coupled with the rising costs created by intergenerational aging for many governments will further impact upon fiscal sustainability targets. This, in turn, will heighten the need for sustained fiscal policy action (such as prudent budget management and the restoration of balance sheet health) over the next 40 years.
The report finds that the greatest government debt burden is being carried by the developed world, even though both developed and developing economies command roughly the same percentage of world GDP. By 2015, the top seven developed countries included in this survey (Canada, France, Germany, Italy, Japan, UK and US) will make up 86.5 percent of the total general government sector (GGS) debt accumulated by the 19 countries, while the eight developing countries (Argentina, Brazil, China, India, Indonesia, Mexico, South Africa and Turkey) will hold only 11.6 percent.
“This finding is particularly important given the increasing interconnectedness of the global economy,” said Nick Baker, Global Head of KPMG’s Finance & Treasury practice. “Slow growth outlooks within any sizable portion of the world economy will inevitably lead to fiscal challenges in other jurisdictions, making the government debt levels of the developed world particularly worrying for the prospects of those economies in the developing world.”
KPMG’s Herhalt, Baker and other authors of the report suggest a comprehensive fiscal sustainability framework built on a core set of elements, including:
- Balanced fiscal policies to govern for the common good of both current and future generations.
- Clearly defined targets and measurements to monitor fiscal sustainability progress.
- Implementation addressing fiscal sustainability not just across the budget cycle (1-5 years), but also the economic cycle (6+ years) and the intergenerational cycle (10+ years).
- Mechanisms and institutional objectives that will serve to sustain policy across the political cycle.
- The coordination of robust regulatory and financial system institutional frameworks, fiscal policy and rigorous fiscal management practices.
“Ultimately, the fiscal sustainability of government finances for both developed and developing economies depends on managing a combination of global economic shifts; existing sovereign debt levels; potentially slower global growth; and the impact of intergenerational change upon government finances,” added Mr. Baker. “It is not about the size of government spending per se, nor is it about the extent of social welfare or the level of entitlement spending that a nation’s citizenry wishes to embrace – it is about ensuring that short-termism and political expediency do not endanger a nation’s long-term fiscal viability.”
KPMG examined the fiscal policy settings of 19 countries within the G20 group of countries across the budgetary, economic and intergenerational cycles. The report offers a country-comparative perspective in order to highlight some of the existing fiscal policy framework elements against the trend perspective offered by each country’s relevant government financial statistics. The report focuses specifically on the general government sector (GGS) to enable the application of an ‘entity’ lens rather than a macroeconomic one. The data tables and much of the commentary included in this paper is based on the extensive and ongoing work done by the IMF, World Bank and Organization for Economic Co-operation and Development (OECD).