Toronto Island.

G-20 Summit: Leaders of the world’s biggest economies agreed on Sunday on a timetable for cutting their deficits and stemming the growth of their public debt, despite the Obama administration’s concern that cutting spending could imperil the fragile global recovery that is currently underway. The leaders also supported higher capital demands for banks.

At the conclusion of the two-day summit in Toronto of the Group of 20 countries, the leaders endorsed a goal of cutting government deficits in half by 2013 and stabilizing the ratio of public debt to GDP (gross domestic product) by 2016. Canada’s prime minister, Stephen Harper, had proposed the targets and was supported by European leaders in particular. 

The summit communiqué said in response to concerns of the United States, Japan, India and some other G-20 countries, that deficit reduction should be “tailored to national circumstances” and the timetable is an expectation, rather than as a firm deadline. Heavily indebted Japan was specifically exempted.

The communiqué noted that following through on fiscal stimulus and communicating “growth friendly” fiscal consolidation plans in advanced countries that will be implemented going forward, it said sound fiscal finances are essential to sustain recovery, provide flexibility to respond to new shocks, ensure the capacity to meet the challenges of aging populations, and avoid leaving future generations with a legacy of deficits and debt.

However, it acknowledged that the path of adjustment must be carefully calibrated to sustain the recovery in private demand. It said there is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recovery. There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth. Reflecting this balance, the statement said 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.

“The US may be concentrated on premature fiscal tightening, but most other countries are looking with a nervous eye to the sovereign debt mess in Europe,” said Kenneth Rogoff, a Harvard economist, former chief economist of the International Monetary Fund and co-author of the celebrated book: This Time Is Different: Eight Centuries of Financial Folly. “Aiming for a gradually improving debt-to-GDP ratio by 2016 is hardly wild-eyed fiscal conservatism.”

German Chancellor Angela Merkel and British Prime Minister David Cameron watched the second-half of the Germany-England World Cup game on Sunday when Germany thrashed England in a resounding 4-1 victory. "I am still all excited," Merkel said to reporters. "I can only say to the German team, go on like this - - it was great. Today everything went perfectly in the heads and in the legs."

Dominique Strauss-Kahn, Managing Director of the IMF said:  “I am encouraged by the conclusions of the G-20 Summit, including the active engagement of the leaders in developing the G-20 Framework for Strong, Sustainable and Balanced Growth.”

The leaders agreed in Toronto to develop a comprehensive action plan to be finalised at the Seoul Summit next November. “IMF analysis in support of the G-20 Mutual Assessment Process shows that appropriate collective action could increase global GDP by 2.5 per cent over the medium term, creating tens of millions of jobs, lifting tens of millions more out of poverty,” Strauss-Kahn said.

He noted that more robust growth is needed both to reduce unemployment and to lessen the burden of large public debts. “The G-20 Mutual Assessment Process is the mechanism through which the growth challenge can be addressed. It points to three areas for action. First, fiscal consolidation in advanced countries is unavoidable. This means putting in place now credible fiscal plans, mostly starting in 2011, since the recovery is still fragile. Second, economies with surpluses need to boost internal demand, for example by spending on social safety nets, improving infrastructure, and allowing exchange rate flexibility. And third, structural reforms, especially in the advanced economies—encompassing changes in goods and labor markets that will lift growth, and financial reform that will make it sustainable.”

The leaders pledged that banks must hold sufficient capital to withstand future losses in a crisis as severe as that which brought the world’s leading banks to their knees in 2008.

The communiqué confirmed that the requirement for banks to increase capital ratios, known as Basel III will be phased in : “The amount of capital will be significantly higher and the quality of capital will be significantly improved when the reforms are fully implemented."

There are ongoing arguments as to what will count as the new capital buffer to make banks more robust in withstanding financial crises.

“We agreed that all members will adopt the new standards and these will be phased in over a timeframe that is consistent with sustained recovery and limited market disruption,” the communiqué said, adding that the transition to the new rules would be informed by economic assessments currently being undertaken by the Financial Stability Board.

The rules are to be completed at the Seoul Summit.

While the leaders said they aimed to adopt the rules by the end of 2012, they cautioned that the standards would be “phased in over a time frame that is consistent with sustained recovery and limits market disruption.”

The Financial Times reports that the number of European banks subjected to stress tests is likely to rise, with sources suggesting that as many as 100 institutions will be involved in a broader exercise to shore up market confidence.

One German government official said those tests, which are being conducted by the Committee of European Banking Supervisors (CEBS), would be expanded to cover “significant market share” in each market – about half of all bank balance sheets in each country.

Kevin Grice, senior international economist at Capital Economics, says it's important that G20 countries introduce banking regulations gradually in order to avoid stalling the recovery. He speaks to CNBC's Karen Tso, Martin Soong and Sri Jegarajah: