The Anglo-Saxon Budget Laboratories

BRUSSELS – The threat last month of a downgrade of the United States’ federal debt by the rating agency Standard and Poor’s was in a way merely a confirmation of what market participants and observers already knew: US fiscal policy is unsustainable. But the symbolic significance of S&P’s assessment was huge, for it underscored an inescapable truth: worries about public debt that were once confined to a few delinquent countries are now bearing down on the world’s biggest and richest economies.

The message is loud and clear: if the quality of US federal bonds, traditionally the beacon of financial safety, can be questioned, no country is immune from attack. Throughout the advanced world, the question for governments now is not whether it is time to reduce deficits, but how fast, how far, and by what means.

In Europe, German Chancellor Angela Merkel is portrayed as a tough deficit cutter. But while she likes to raise her voice, she acts with caution: today’s German fiscal adjustment is, in reality, very gradual. The countries facing the fiercest budget battles are, instead, the United Kingdom and the US, where fiscal deficits exceeded 10% of GDP in 2010.

In London, Prime Minister David Cameron is on the offensive. Upon assuming office, he entrusted budgetary forecasting to a new, independent Office for Budget Responsibility (OBR), thus forfeiting any opportunity for sleight-of-hand. He then announced a bold consolidation program to cut the cyclically adjusted deficit by 1.5% of GDP per year, thereby targeting a deficit of 3.5% of GDP in 2013.