Global Economy
Budget surpluses rare in developed countries from 1980s; Italy, France, Greece had none in 60 and 40 years
By Michael Hennigan, Finfacts founder and editor
Jul 20, 2015 - 4:06 PM

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John Maynard Keynes, the Depression-era British economist, advocated public deficits during economic downturns to stimulate demand and employment, while he believed that in times of relative prosperity that countries should aim to have budget surpluses. In the period since the end of the Second World War in 1945, Italy has had 60 years of continuous deficits; France and Greece have had 40-year trends while in other developed countries an annual surplus has become rare since the 1980s.

France's last annual budget surplus was in 1974 while the national debt to GDP (gross domestic product) ratio rose from 22% in 1975 to 82% in 2010 and 97% in 2015.

We have recently covered the Italian and Greek experiences here:

Italy posts annual budget deficit every year since Second World War — Italy's gross debt ratio is at 134% in 2015 and it was only due to wartime hyperinflation that the Italian Republic which was founded in 1946 could begin with a reasonable public debt level.

Greece was star economic performer in 1950-1973; Budget deficits every year since 1974

In the US, according to the White House budget office, debt held by the public grew from 16% of GDP in 1930 to 109% in 1946.

In the period 1947-1960, there were 7 years of deficits and 7 years of surpluses with the deficits also matching the surpluses and in the period 1961-1978, there was only one surplus year.

In 1981, debt held by the US public stood at 25.8% of GDP by 1981 — less than two percentage points higher than its postwar low. Tax cuts and high military spending increased debt held by the public from $789 billion in 1981 to $3.0 trillion (48.1% of GDP) in 1992. In 1998 the US recorded its first budget surplus ($69.3 billion) since 1969. An economic downturn in 2001 coupled with tax cuts ended the surpluses.

In the UK according to the Institute for Fiscal Studies, the "deficit fluctuated in the region of 2–3% of GDP in every year after 1953 until 1967. The deficit increased to almost 4% in 1967, but this was immediately followed by a fiscal tightening visible from 1968, which eventually produced surpluses in both 1969 and 1970."

The end of Europe's Golden Age of Growth from 1950 to 1973, was followed by a recession that was induced by a quadrupling of the price of crude oil. The UK had a deficit in 1975 at a then postwar peak of 7.3% of GDP and surpluses did not occur again until 1988-1990 in the closing years of Margaret Thatcher's premiership.

The last surpluses achieved by the UK were in 1998-2001 in Tony Blair's first term.

In Ireland in 1975, inflation surged above 20% and in 1977 Fianna Fáil, the biggest Irish political party, won a landslide election victory promising a big public spending programme.

In 1978, Ireland had a deficit of 17.8% of GDP — a record for a developed country in the period 1970-2008 (see chart above). A year later Ireland had the worst work strike record since independence in 1922.

Jim O'Leary, an economist at NUI Maynooth, has commented: "After running very large double-digit budget deficits during the late 1970s and most of the 1980s, racking up a huge debt which had grown to 113% of GDP by 1987, Ireland staged a remarkably successful fiscal consolidation in the late 1980s. By 1989 the deficit had dropped below 3% of GDP, never to breach this level again until 2008, and the debt ratio had fallen below 100%, a prelude to it falling a good deal further. By 1997, the Irish government was running a budget surplus and that outcome was repeated in all but one of the next ten years. Over the 1997-2007 period the budget surplus averaged 1.7% of GDP and the debt-GDP ratio fell from 74% to 25%. In the five years prior to the onset of the current crisis the average budget surplus was somewhat less than this at 1.3% of GDP. It is worth making the point that while Ireland was not unique amongst EU member states in the consistency with which it ran budget surpluses between 1997 and 2007 (Finland and Luxembourg also achieved surpluses in 10 out of 11 of these years, Denmark in nine, Sweden in eight), it was well ahead of the norm in this regard. Several member states - France, Italy, Austria and Portugal amongst them — failed to register a single budget surplus in this period, and the aggregate position of the EU as a whole is that a surplus was recorded in only one year (2000)."

In 2007 when the US subprime crisis and credit crunch signalled that the global financial sector was in trouble, Ireland and Finland, two small economies that had experienced economic crises over the previous two decades, were in sharply different positions in respect of vulnerability to an international shock.

Ireland's net public debt was 10.5% of GDP compared with Finland's minus -72.5%; household debt was at 210% of gross disposable income compared with Finland's 110%.

In 2007 and 2008 Finland had surplus/GDP ratios of 5.3% and 4.2% while Ireland's levels were 0.1% and a deficit of 7.3% of GDP in 2008.

Germany surpassed its own growth predictions last year and recorded an €18 billion budget surplus across all government levels, according to figures released by Destatis, the federal statistics office. The surplus followed small ones in 2012 and 2013 and was at 0.6% of German GDP in 2014 and compared with the -4.1% of GDP deficit ratio recorded 2010.

Germany’s public debt had risen since 1970 from about 20% of GDP to over 60% in 2004 and following the large spending from the early 1990s on reunification, surpluses were recorded in 2000 and 2007.

The European Commission forecasts a gross German public debt ratio of 71.5% of GDP in 2015.

Despite its massive property boom, Spain only managed small surpluses in 2005-2007.

Deficit and surplus figures for the Eurozone & UK from launch of euro in 1999 to 2012 (Microsoft Excel)

Australia has had a 42 year period where surpluses were achieved in about half the period.

Interest rates are at a historical low, which helps indebted countries like Italy but the legacy of debt remains a drag on the economy. Meanwhile Finland is facing economic challenges but it still has minus public debt in 2015.

Jean-Pierre Dumas, a French economist, in 2009 wrote on the IMF's call for fiscal stimulus: "Keynes' name is invoked to justify the need for fiscal stimulus. But when Keynes developed his ideas in 1936, public expenditure to GDP was low (20-25%), there were no budget deficits, and central banks were restrictive. We should be careful not to confuse the present situation where public expenditure accounts for more than 40% of GDP in advanced economies with the situation in Keynes' days. But what we need to remember is that because of the scale of social transfers in Europe, automatic stabilizers will do a lot to stimulate the economy even in the absence of discretionary fiscal packages."

Reza Moghadam, then director of European Department, International Monetary Fund, said in a speech to the Brussels Economic Forum in June 2014: "Public finances deteriorated significantly with the crisis: the average public debt-to-GDP ratio in the euro area soared by about 30 percentage points. Most of this deterioration was not due to discretionary fiscal stimulus — it was mostly the effect of automatic stabilizers (as revenues fell and expenditures rose in the recession) and exogenous factors (like the bail-out of the banking sector). In essence, countries did not enter the crisis with strong enough fiscal positions to withstand such large shocks."

Moghadam said in respect of the euro rules of a 3% of GDP annual deficit ceiling and a maximum debt ratio of 60%, that "the focus on nominal rather than structural targets, as well as weak enforcement, provided little incentive to build fiscal buffers. The 3% of GDP nominal deficit ceiling did not prevent countries from spending their revenue windfalls in the mid-2000s. While revisions to the fiscal framework in 2005 did introduce structural balance targets, compliance was, and remains, very weak. Apart from Finland and Luxembourg, Euro Area countries have struggled to consistently meet their structural balance targets since the late 1990s."

The 3% nominal deficit rule was initially meant to stabilize public debt at 60% of GDP, assuming that nominal growth would be 5% per year. However, downward revisions of nominal long-term growth to around 3% in many Euro Area countries suggest that debt would instead converge toward 100% of GDP.

Moghadam added that "debt dynamics, i.e., the evolution of the debt-GDP ratio, should be the single fiscal anchor, and a measure of the structural balance the single operational target. This would go a long way to simplifying the system while retaining flexibility against cyclical shocks."


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