25 January 2013
In the same week that the Office of National Statistics announced that UK public sector borrowing rose in December and net debt reached its highest level of 2012, at 70.7 percent of GDP (£1,111.4bn), KPMG releases its Walking the fiscal tightrope report, which analyses the struggle of governments around the world to achieve fiscal sustainability.
Analysis of economic data from the G20 economies leads the professional services firm to assert that:
- The roots of the current sovereign debt crisis do not solely lie in the global financial crisis of 2007-2008 as levels of government debt were already reaching their limits long before the global financial crisis hit.
- Countries with a high level of gross debt prior to the start of the crisis - which it classes as more than 60 percent of GDP - have been the most limited in their ability to respond to the global debt crisis and face a longer and more difficult path back to sound fiscal sustainability.
- The pressure on public finances created by the rising costs of the aging population 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 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 the report (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.
Alan Downey, who leads KPMG’s UK public sector practice, says:
“The government’s efforts to reduce the deficit have been stymied by a lack of economic growth - leading to lower than expected tax receipts and higher spending.
“With the UK’s net public debt rising steadily through 2012 to more than 70 percent of GDP in December, we could see an increase to the peak of 89 percent next year that our report signals. This compares to the 2000-2007 levels of between 32 and 38 percent.
“To turn the corner on the sovereign debt crisis governments must shun short-term thinking and political expediency, instead committing to sustained fiscal policy implementation, a strategy that the so-called Fiscal Compact in the eurozone intends to create.
“This is particularly important given the increasing interconnectedness of the global economy. Slow growth within any sizable part of the world economy will inevitably lead to fiscal challenges in other jurisdictions, making the government debt levels in the developed world particularly worrying.”
The report suggests 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.
About the report
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).
About KPMG International
KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 156 countries and have 152,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such. KPMG International performs no professional services for clients nor, concomitantly, generates any revenue.
For further information, contact:
Alison Anderson, KPMG Corporate Communications
T: 0113 254 2980 E: firstname.lastname@example.org