Red-Ink River Runs Through Budgets Of World's Powers

Think the United States is the only nation with a daunting deficit problem? Think again: Red ink is now flowing like a river in finance ministries around the world.

Germany, Japan, France, and many other rich industrial countries are running unprecedented fiscal deficits as they struggle to pay for generous social programs instituted in years past. These nations' leaders risk voter wrath if they trim cherished benefits - but if they don't do something, and fast, their long-term economic stability may be threatened.

That's because their budget pressures could only get worse as today's populations age and line up for promised government retirement and health-care benefits.

Current fiscal policies "appear unsustainable in most industrial countries," concludes the International Monetary Fund in its just-released World Economic Outlook.

In some ways, the US debt crisis doesn't look quite so bad when measured against what's happening elsewhere.

This doesn't mean that Uncle Sam's habit of government-by-credit-card shouldn't be cured. But consider the figures: Last year, the average industrial country ran a deficit that was 3.5 percent of its gross domestic product, the IMF says. For the US, the debt to GDP ratio was 2.0 percent - and this year, it should come in at 1.7 percent or less.

Economists like the debt/GDP measure because they feel it is a more realistic measure of a nation's deficit burden than overall red-ink totals. According to this indicator, a number of nations long thought as models of frugality are struggling with fiscal problems: Germany ran a general government deficit of 3.5 percent of GDP. The comparable figure for Japan was 3.1, while Canada's debt/GDP ratio was 4.2.

France and Italy's red-ink performance was even worse. Ironically, some nations farther back in the economic pack, such as Mexico, have had lower deficits recently than richer brethren.

"In the last few years, whenever the subject of debt came up everybody thought only in terms of developing countries," says Jose Epstein, director of the Development Banking Program at American University in Washington. "But that's just not the case anymore."

Recession is one reason industrial nations have had a bad debt performance. Facing tough economic considtions, Western Europe in particular saw social-program costs balloon, as more and more people needed government unemployment benefits. At the same time, government revenues dropped as sluggish business returns kept tax payments lower than predicted.

That's one reason the short-term US deficit problem isn't so dire, point out experts. America pulled out of recession long ago, and years of decent economic growth have helped ease government debt pressure.

But some experts judge that when it comes to deficits there's more than a short-term slowdown at work. The crucial point seems to have been sometime in the late 1970s, after rich nations emerged from the first oil price crisis. The debt trendline of industrial nations, taken as a whole, then took a serious turn for the worse.

The rate of revenue coming in does not seem to have been the primary problem. In 1960, industrial nation tax receipts averaged about 28 percent of GDP. By 1994, these same countries were collecting about 44 percent of their gross domestic products in taxes - largely due to higher rates or increased social security contributions.

Instead, the deficits were caused because spending increased even faster than revenues. In 1960 government expenditures in industrial nations averageded 28 percent of GDP - the same as revenues. But by 1994, expenditures were 50 percent of annual economic activity, leaving a significant structural gap between money coming in and payments going out.

Well-intentioned growth in social spending is a primary force behind the expenditure rise, the IMF says. "Virtually all of the growth of government spending has been in the areas of transfers, subsidies, and interest payments, not public investment of eduction," concludes the IMF report.

BIG deficits absorb cash away from the private sector, pushing interest rates higher than they would otherwise be. They also loom as in increasing burden on future generations. But what's the best way to stop the flow of red ink? Raising taxes is one solution - but few nations, the US included, have the inclination to do so. Reforming social spending is the only way to go, say a number of economists. But that's easier to present as a position paper than a political proposal.

The US struggle to produce a seven-year balanced budget plan may be only a taste of things to come. Western European nations may face an even more difficult time, as their citizens have long viewed their government safety net as in integral part of their culture.

"There are limits to how much you can cut back unless you want to disrupt the social consensus," says Wolfgang Reinicke of the Brookings Institution.

Germany's current situation may be indicative: A central government proposal to cut social spending by 2 percent of GDP next year has raised a firestorm of protest from the country's powerful trade unionists.

Chancellor Helmut Kohl's government seems to be pushing on with its fiscal plans, regardless. That's unusual in a nation where policy-by-consensus is more valued than it is in the US.