The year 2010 was a turning point for the G20 experiment. By April of that year, many leaders had decided at an informal meeting in Washington that stimulus spending had, for the most part, run its course and should soon be replaced with austerity measures in order to stave off financial disaster of another sort: debt crises.
At the G20 summit in Toronto two months later, despite reservations from some countries that it was too early to pull back government spending, advanced economies pledged to implement “growth-friendly medium-term fiscal consolidation plans,” or austerity measures. “Failure to implement consolidation where necessary,” they argued, “would undermine confidence and hamper growth.”
Almost a year and a half later, at the 2011 G20 summit in Cannes, the University of Toronto-based G20 Research Group released an assessment on the Toronto commitments.
All ten of the advanced economies that vowed fiscal consolidation - Australia, Canada, France, Germany, Italy, Japan, Korea, United Kingdom, United States, and the European Union - earned the G20 Research Group’s highest rating, a 1+, meaning a “member fully implements its G20 differentiated approach to fiscal consolidation.”
As one might expect, the 100 percent success rate is not a reflection of overall economic health of the 10 economies. Indeed, the last 17 months have been a roller coaster of economic expansion and contraction (the EU), civil society upheavals in response to austerity measures (the UK), and toxic brinksmanship over which fiscal policy to adopt in the government (the U.S.).
Today, some of the advanced economies are even contemplating new stimulus packages to avoid a double dip. To be sure, one wouldn’t expect a 1+ rating from so many examples of economic disfunction, especially after the "+" was stripped from the credit rating of the most advanced of them.
The reason for the unintended results is that the countries themselves set the bar by which they were judged. They formulated and implemented austerity measures that were “differentiated according to [their own] national circumstances,” as explained in the Toronto commitment.
The U.S. is a case in point. According to the G20 Research Group report, “the United States entered the Toronto Summit with a budget deficit of US $1.3 trillion, about 9 percent of GDP.” The deficit has since climbed to US $1.645 trillion in 2011 at 10.9 percent” of GDP. Citing White House budget projections, the budget deficit is expected to shrink “to US $627 billion and 3.0 percent of GDP in 2017 due to [the United States'] comprehensive fiscal plan.” In other words, the U.S. fiscal situation was worse off in 2010 than 2009 (and is still worse in terms of budget deficit in 2011), yet received a top rating based on projections by those officials who have great incentive to paint a rosy picture of the fiscal future.
As any casual observer of U.S. politics since 2009 will attest, however, that long-term projections of virtually anything in Washington, let alone multi-trillion dollar budget cuts, are a fantasy if they require compromise between the executive and legislative branches.
Donald Brean, professor of finance and economics at the University of Toronto and the co-director of the G20 Research Group, said that the high ratings of seemingly dysfunctional economies is to be expected, and lends valuable insight into the G20 as an international organization.
When you have “nineteen different countries and the EU with differing macroeconomic policies, trying to coordinate is unrealistic.” The financial crisis that brought the 20 biggest economic powers together in 2008 was a rare occurrence, in other words; and the current parting of ways is closer to the norm. Agreeing on the principle of global growth - as the Toronto commitment did by setting a fiscal consolidation goal - might be the best one can hope for.
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Commitments Skewing the Results at the G20
November 3, 2011
The year 2010 was a turning point for the G20 experiment. By April of that year, many leaders had decided at an informal meeting in Washington that stimulus spending had, for the most part, run its course and should soon be replaced with austerity measures in order to stave off financial disaster of another sort: debt crises.
At the G20 summit in Toronto two months later, despite reservations from some countries that it was too early to pull back government spending, advanced economies pledged to implement “growth-friendly medium-term fiscal consolidation plans,” or austerity measures. “Failure to implement consolidation where necessary,” they argued, “would undermine confidence and hamper growth.”
Almost a year and a half later, at the 2011 G20 summit in Cannes, the University of Toronto-based G20 Research Group released an assessment on the Toronto commitments.
All ten of the advanced economies that vowed fiscal consolidation - Australia, Canada, France, Germany, Italy, Japan, Korea, United Kingdom, United States, and the European Union - earned the G20 Research Group’s highest rating, a 1+, meaning a “member fully implements its G20 differentiated approach to fiscal consolidation.”
As one might expect, the 100 percent success rate is not a reflection of overall economic health of the 10 economies. Indeed, the last 17 months have been a roller coaster of economic expansion and contraction (the EU), civil society upheavals in response to austerity measures (the UK), and toxic brinksmanship over which fiscal policy to adopt in the government (the U.S.).
Today, some of the advanced economies are even contemplating new stimulus packages to avoid a double dip. To be sure, one wouldn’t expect a 1+ rating from so many examples of economic disfunction, especially after the "+" was stripped from the credit rating of the most advanced of them.
The reason for the unintended results is that the countries themselves set the bar by which they were judged. They formulated and implemented austerity measures that were “differentiated according to [their own] national circumstances,” as explained in the Toronto commitment.
The U.S. is a case in point. According to the G20 Research Group report, “the United States entered the Toronto Summit with a budget deficit of US $1.3 trillion, about 9 percent of GDP.” The deficit has since climbed to US $1.645 trillion in 2011 at 10.9 percent” of GDP. Citing White House budget projections, the budget deficit is expected to shrink “to US $627 billion and 3.0 percent of GDP in 2017 due to [the United States'] comprehensive fiscal plan.” In other words, the U.S. fiscal situation was worse off in 2010 than 2009 (and is still worse in terms of budget deficit in 2011), yet received a top rating based on projections by those officials who have great incentive to paint a rosy picture of the fiscal future.
As any casual observer of U.S. politics since 2009 will attest, however, that long-term projections of virtually anything in Washington, let alone multi-trillion dollar budget cuts, are a fantasy if they require compromise between the executive and legislative branches.
Donald Brean, professor of finance and economics at the University of Toronto and the co-director of the G20 Research Group, said that the high ratings of seemingly dysfunctional economies is to be expected, and lends valuable insight into the G20 as an international organization.
When you have “nineteen different countries and the EU with differing macroeconomic policies, trying to coordinate is unrealistic.” The financial crisis that brought the 20 biggest economic powers together in 2008 was a rare occurrence, in other words; and the current parting of ways is closer to the norm. Agreeing on the principle of global growth - as the Toronto commitment did by setting a fiscal consolidation goal - might be the best one can hope for.
