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Euromonitor International
18 June 2010
At a time when the health of the global financial system has started to improve, a new threat to global financial
stability is emerging from the sharp increases in government debts and deficits, especially in developed countries.
Cutting budget deficits is an urgent need for many governments, but exiting from high public debts will be a more
difficult task, one which requires fundamental long-term changes.
• Government debt and deficit: what are they?
• How did countries accumulate large debts and deficits?
• Why should debt and deficit matter?
• How to cut budget deficits and exit high public debt?
• What is the future outlook?
When the government is running a deficit, it has to borrow the money needed to finance its expenditure plans each
financial year. It borrows by issuing securities such as long-term government bonds and short-term notes and bills to
the public, or by borrowing directly from the capital markets. Government debt, also known as public debt or
national debt, is the total amount of all government borrowing which has not been repaid.
Debt and deficit are usually viewed as a percentage of GDP. Because the ratios of public debt and deficit to GDP
measure a country's debt and deficit in relation to the size of its economy, they indicate the country's ability to pay
back its public debt and serve as a barometer of a government's financial health. Economists say that budget deficits
above the level of 3.0% of GDP are generally unsustainable while the EU limit for public debt is 60% of GDP.
The combination of higher government expenditure and lower tax revenues has led to soaring public debts in many
countries, especially in the developed world:
• The average public debt-to-GDP ratio of the G20 economies, which stood at 62.4% in 2007 prior to the global
financial crisis, is estimated to have risen to 82.1% in 2009 and is expected to hit 86.6% in 2014;
• In Japan, years of economic stagnation have increased the country's public debt ratio from 50.7% of GDP in
1990 to 183.8% in 2009, the highest ratio of all developed economies. In March 2010, the Japanese parliament
passed a record ¥92.3 trillion (US$1.0 trillion) budget for the 2010/11 financial year, as the government plans to
launch fresh stimulus measures to boost economic recovery in 2010. The government will issue an all-time
record ¥44.3 trillion of new bonds to help fund a revenue shortfall, which will see Japan's public debt reaching
200% of GDP – or being twice as much as the economy – in 2010;
• In the eurozone, where countries are abided by the European Union's Maastricht Treaty rules which set a 60.0%
of GDP limit on public debt and a 3.0% of GDP limit on government budget deficits, the global financial crisis
has exposed the high levels of public debt in the PIIGS economies of Portugal, Ireland, Italy, Greece and Spain.
In particular, Italy and Greece are the two countries with the highest public debt-to-GDP ratio, at 115.2% and
113.3% respectively in 2009;
• In 2010, after years of profligacy (hosting an expensive Olympic Games in 2004 and failing to rein in its spiral
public debt), financial misreporting (to comply to the Maastricht criteria), and poor tax collection, Greece
plunged into a public debt crisis when the markets lost trust in the government's plan to cut its deficit and
believed that Greece could default on its debts.
Chart 1 Government borrowing as a percentage of GDP in the eurozone: 2009
% of GDP