G-20 nations to focus on deficits

Sewell Chan and Jackie Calmes

TORONTO: Leaders of the world's biggest economies agreed Sunday on a timetable for cutting deficits and halting the growth of their public debt, though they also acknowledged the need to move carefully so that reductions in spending did not set back the fragile global recovery.

The action at the Group of 20 summit meeting here signalled the determination of many of the wealthiest countries, after enacting spending programmes to counter the worldwide financial crisis, to now emphasise debt reduction. And it underscored the conviction of European nations in particular that deficits represent the biggest threat to their economic stability.

U.S. President Barack Obama and Treasury Secretary Timothy F. Geithner had consistently advocated a measured approach to debt reduction that would not stymie growth and lead to a double-dip recession.

The United States, however, joined other countries at the summit meeting, which was met by protests and several hundred arrests, by endorsing a goal of cutting government deficits in half by 2013 and stabilising the ratio of public debt to gross domestic product by 2016. Canada's Prime Minister Stephen Harper had proposed the targets, backed by Germany and Britain.

To assuage objections from the United States, Japan, India and some other countries, the timetable was couched as an expectation, rather than a firm deadline.

The G-20 joint statement explicitly stated that Japan, which is heavily dependent on domestic borrowing, was not expected to meet the targets.

The divisions were in contrast to the unity that characterised the previous three G-20 summits, when the urgency of a potential global collapse produced solidarity and a unified economic approach. Although Mr. Obama insisted emphatically that there was “violent agreement” on the need to reduce debt over time, the final communiqué included a delicately worded call for deficit reduction “tailored to national circumstances”. In essence, the leaders were blessing their decision to go their own ways.

Nod to both sides

The joint statement acknowledged both sides of the debate. “There is a risk that synchronised fiscal adjustment across several major economies could adversely impact the recovery,” the statement said. In a news conference at the conclusion of the summit meeting, Mr. Obama referred only indirectly to the disagreement with Europe, saying: “We must recognise that our fiscal health tomorrow will rest in no small measure on our ability to create jobs today.”

It is the first time the G-20 has set dates for deficit reduction, but the timetable, which is not binding, will probably not require new policy actions. Most of the governments, including the United States, have already put forward budget proposals in line with the targets.

The leaders also discussed banking regulations, but could not agree on a proposal for a global bank tax, supported by the United States, Britain and the European Union, but opposed by Canada and Australia.

And while the G-20 reaffirmed a deadline — their next meeting, in November in Seoul, South Korea — for agreeing on new capital standards for banks, they signalled that several countries might not implement the standards by 2012, as initially planned.

“While the illusion of progress is good, I don't see real action to alter the imbalances that brought us to this crisis,” said Raghuram G. Rajan, a former chief economist at the International Monetary Fund who is now a professor in the Booth School of Business at the University of Chicago.

The United States, he said, continues to run large trade deficits financed by Germany, China and Japan. “The U.S. has been the world's consumer of first resort,” he added, “and because it has been unable to persuade other countries to spend more or to reform quickly, it is likely to take up that position once again.” — New York Times News Service