Can Greece Cut Its Deficit by 10% of GDP, Part II

As  I noted a few days ago, some nations have managed even larger budget adjustments than the one that Greece faces today.  Several commenters rightly noted, however, that this slim reed of hope becomes even slimmer when you consider other factors such as the pace of adjustment (Greece would have to cut very quickly) and its inability to devalue its currency (unless it leaves the eurozone).

Michael Cembalest of JP Morgan put together a sobering chart that highlights how severe Greece’s challenges are compared to other nations that have accomplished major budget adjustments in the past (hat tip: Paul Kedrosky at Infectious Greed):

Today Greece finds itself high on the vertical (i.e., needing a very rapid fiscal adjustment) with minimal growth prospects and no ability to devalue.

Can Greece Cut Its Deficit by 10% of GDP?

Greece needs money fast. The International Monetary Fund (IMF) and members of the Euro-zone have that money. But before they lend it to Greece (at very favorable interest rates), they are demanding that Greece get its fiscal house in order.

As a result, Greece is proposing an austerity plan that would reduce its out-of-control budget deficits (currently standing at more than 13% of GDP) by at least 10-11% of GDP.

You might wonder whether that’s possible. History suggests the answer is yes, at least in principle. Indeed, several countries have achieved even larger deficit reductions.

According to an IMF study that I discussed a few months ago, the past three decades have witnessed at least nine instances in which developed nations have cut their structural deficits by at least 10% of GDP:

  1. Ireland (20%, 1978-89)
  2. Sweden (13%, 1993-2000)
  3. Finland (13%, 1993-2000)
  4. Sweden (13%, 1980-87)
  5. Denmark (12%, 1982-86)
  6. Greece (12%, 1989-95)
  7. Israel (11%, 1980-83)
  8. Belgium (11%, 1983-1998)
  9. Canada (10%, 1985-99)

This list demonstrates that large-scale budget improvements are possible. But they don’t always stick. Sweden, for example, makes two appearances in the top nine. Its gains in the 1980s were undone in the financial crisis of the early 1990s, so it had to undertake a second round of austerity. And Greece itself is a repeat offender, as its gains from the early 1990s have all been lost.

Greece faces enormous practical and political challenges in its austerity efforts, and success is hardly guaranteed. The nation can take some encouragement, however, from the fact that other nations have addressed even larger budget holes.

With some hard work and luck, perhaps Greece will join Sweden as a two-time member of the Large Deficit Reduction Club.

America in the Red, AOL Version

Responding to all the recent talk of a value-added tax, AOL News poses the following question today: “Do we need a new way to tax citizens?

In response, AOL posts several pieces about the pros and cons of a VAT (by Henry Aaron and Isabel Sawhill, Ira Stoll, and Veronique de Rugy). In addition, it also includes an abridged version of my National Affairs piece, “America in the Red,” which they titled “Don’t Take Anything Off the Table.”

If you haven’t found time for the full length version, with charts, you might want to try AOL’s abridged one. (Please note that they did the abridging.)

America in the Red

The new issue of National Affairs includes an essay in which I summarize my thinking about our nation’s fiscal challenges.

In “America in the Red” (pdf version), I describe our fiscal challenge, explain how deficits and debts may undermine our prosperity, and emphasize the importance of setting clear budget goals.

I also argue that everything should be on the table in thinking about our budget future. Growth alone won’t set us free. Spending cuts alone won’t be enough. And tax increases alone won’t work either. We need to pull on all the levers–reducing spending, increasing revenues, and promoting growth–if we want to get our fiscal house in order.

Greece Starts Selling … But Not Corfu

Greece is ready to start selling assets, according to the Wall Street Journal, but Corfu and the Parthenon are not on the auction block (no surprise there).

Instead, the government figures that by selling its stakes in a bank and a betting company, as well as its share of the national telecommunications company, it can raise €2.5 billion ($3.76 billion)—the equivalent of 1% of gross domestic product, its target for this year. That would only scratch the surface of Greece’s debt—which has surpassed the country’s €250 billion-a-year GDP—but would underscore for financial markets that Athens is serious about fixing its public finances.

The government also may put up for sale its shares in 15 other companies, including the water utility in Athens, a leading oil refiner, and several casinos. The Finance Ministry also wants to get rid of some Airbus A340 planes that it owns from the years before the country’s debt-ridden national carrier, Olympic Airlines, was privatized.

P.S. I love the transliterated name of the betting company: the Organization for Prognostication on Soccer Matches.

Talking About Our Budget Woes

On Thursday, I appeared on Canada’s Business News Network to discuss our budget woes. Also on the show were Joe Minarik of the Committee for Economic Development and Bill Beach of the Heritage Foundation.

The first part of the interview focused on taxes. In a nutshell, my view is that spending restraint won’t be enough to get our budget under control, and therefore tax revenues will have to rise above their historical level (of about 18 – 18.5% of GDP). But our existing tax system is inefficient and will not scale well to higher levels of revenue. Thus any effort to raise more revenues must be coupled with fundamental tax reform. For example, we ought to re-examine how tax expenditures have made swiss cheese of our tax system.

The second part focused on the risks of our growing debt. I view that debt as a serious problem (no surprise). But I remain optimistic that the United States will eventually get its act together to deal with it. I am just not sure when.

What Assets Could the United States Sell?

Several German lawmakers hit a nerve last week with their suggestion that Greece sell some of its assets in order to cut its debts. The German newspaper Bild summarized this line of reasoning quite memorably: “We give you cash, you give us Corfu.”

That zinger has prompted a cottage industry of possibly humorous efforts to tote up what Greece should consider selling. For example, the Christian Science Monitor has a slide show of the top ten items it thinks that Greece could sell, including the Parthenon and the Acropolis.

While no one (?) takes these suggestions seriously, they do raise an important point. Spending reductions and revenue increases are important when governments face budget pressures, but they are not the only option. Governments can also sell off assets.

Which raises a natural question. If push comes to shove, what could the United States sell in order to cut its debts?

The United States isn’t Greece, of course, and I am far from suggesting that we actually need to start selling. On the other hand, there’s plenty of rhetoric (some coming from me) that the United States should set a target for its publicly-held debt. If we do adopt one, we should keep in mind that asset sales may be one way that policymakers may try to reach it.

So what does the United States own?

That’s a hard question to answer completely, but a good place to start is the Financial Report of the United States Government. According to the 2009 report, the U.S. owned $2.7 trillion in assets at the end of 2009, up from only $2.0 trillion a year earlier. Many of these are off-limits (we aren’t going to sell the Capitol or the USS Nimitz), but some raise interesting questions.

For example, we own an impressive portfolio of financial assets:

  • $540 billion in direct loans (e.g., student loans) and mortgage-backed securities
  • $240 billion in TARP loans and equity investments (some of which have since be repaid)
  • $24 billion in a trust that invested in AIG
  • $65 billion in preferred stock in Fannie Mae and Freddie Mac

We also have a tidy amount of gold:

  • $250+ billion (The official financial statements report the gold as worth $11 billion, but that’s assuming gold is worth $42 per ounce. Gold prices are now about 25 times higher.)

Throw in another hundred billion or so for the value of the spectrum that we currently give away for free (not included in the financial statements), and we have a bit more than $1 trillion in assets that might conceivably be saleable. Of course, whether they would actually yield that trillion is an open question.

What about the ideas of the German lawmakers? Wouldn’t they suggest that we could sell Yosemite or Mount Rushmore as well? How much are they worth?

No one knows. Our nation’s accountants understandably make a point of not placing a dollar value on such “stewardship and heritage assets,” almost all of which should never–and will never–be on the auction block.

There might be a few saleable items lurking in there–the United States came close to selling the Presidio in San Francisco a few years back–but the real money is in the financial assets that the government owns.

Budget Thoughts from Steny Hoyer

House Majority Leader Steny Hoyer is building a reputation as one of our most thoughtful leaders when it comes to budget matters. Thus I commend to you the speech on fiscal responsibility he gave at the Brookings Institution today.

Highlights include his criticism of “selfish” budget choices:

[W]hen it comes to budgeting, what is politically easy is often fiscally deadly. It is easier to pay for tax cuts with borrowed money than with lower spending; easier to hide the true costs of war than to lay those costs before the people; easier to promise special cost-of-living adjustments than explain why an increase is not justified under the formula in law; easier to promise 95% of Americans that we won’t consider raising their taxes than to ask all Americans to contribute for the common good. Those kinds of easy choices are so often selfish choices—because they leave the chore of cleaning up to someone else. Easy choices may be popular—but the popularity is bought on credit.

And his discussion of budget options:

On the side of entitlement spending, an agreement might recognize that Americans are living longer lives and raise the retirement age over a period of years, or even peg the retirement age to lifespan. Another option is to make Social Security and Medicare benefits more progressive, while strengthening the safety net for low-income Americans. That could preserve those programs as a central part of our social compact, while protecting their ability to help those of us in the greatest need.

On the side of revenues, President Obama was correct in refusing to take any options off of the commission’s table. No one likes raising revenue, and understandably so. But if you’re going to buy, you need to pay. … If need be, I am hopeful that both parties will agree to look at revenues as part of the solution—not as a gateway to higher spending, but as part of a compromise that cuts spending and balances the budget.

I don’t agree with everything Leader Hoyer has to say in his speech (e.g., I am much more concerned about the budget impacts of the pending health bills, and I view the recent PAYGO bill less favorably because of its many exceptions). But I appreciate how seriously he takes these issues.

P.S. Bruce Bartlett also recommends the speech.

The Lost Budget Decade

Budget aficionados have long warned that the U.S. budget is on an unsustainable path. That’s old news (but important).

The new news, which I hope you’ve noticed, is that those warnings have become more urgent over the past year or so. Why? Because our future problems have moved much closer.

Over at the Committee for Economic Development, Joe Minarik has a nice chart that illustrates how rapidly the budget outlook deteriorated:

Joe’s chart shows two projections of the U.S. publicly-held debt. The blue line shows the history of the debt (measured relative to the size of the economy), as well as a projection of the future debt based on analyses by the Congressional Budget Office released in late 2007. The red line shows a similar projection, but based on CBO budget analyses released in January of this year.

As you can see, the day of debt reckoning has moved much closer. For example, our debt will hit 60% of GDP twelve years earlier than forecast (which Joe rounds down to a decade). And, of course, it will keep rising thereafter.

Bottom line: The warnings of budget experts have become much more urgent because our room for maneuver has gotten much smaller.

The Spectre of Creative Bookkeeping

A spectre is haunting Europe — the spectre of creative bookkeeping.

In an article in this morning’s Wall Street Journal (“Debt Deals Haunt Europe“), Charles Forelle and Susanne Craig provide more examples of the “aggressive” bookkeeping that European nations have deployed to satisfy the deficit and debt targets of the Growth and Stability Pact.

Greece, of course, takes honors in the field, not just for its recent use of derivatives to hide liabilities (see my earlier post), but also for other creative moves in the past. For example, the authors report that Greece:

insisted to the Eurostat statistics authority that large portions of its military spending were “confidential” and thus excluded from deficit calculations. In 2000, Greece reported that it spent €828 million ($1.13 billion) on the military—about a fourth of the €3.17 billion it later said it spent. Greece admitted to underreporting military spending by €8.7 billion between 1997 and 2003.

Such shenanigans are hardly unique to the Greeks. Other players include:

  • Portugal, which “classified subsidies to the Lisbon subway and other state enterprises as equity purchases” in 2001, and
  • France, which “arranged a deal with the soon-to-be privatized France Telecom in 1997 under which the company paid the government a lump sum of more than €5 billion. In return, France agreed to assume pension liabilities for France Telecom workers. The billions from France Telecom helped narrow France’s budget gap.”

Although dated, these examples illustrate some basic strategies that governments use to conceal the size of their deficits and debts: pretend the spending does not exist (Greece), pretend that spending is really an investment (Portugal), or pretend the future pension liabilities aren’t real (France).

A topic for another day is how these strategies may have been used in the United States. Suffice it to say that strategy three–ignoring future pension costs–is widespread both in governments and the private sector.