Fiscal Decisions, A Comparison

Multiple articles were published over the weekend highlighting a distinct difference in thought process and actions of politicians in the U.S. and in Germany.  Barron’s cover story this week reviewed projections from the Congressional Budget Office (CBO) showing that the debt/GDP ratio could easily reach 153% by 2035 if there are not significant changes to current policies, in particular entitlement spending.  This 153% ratio is similar to Greece's current debt/GDP ratio and comparable to Argentina and Ireland, all countries that have experienced recent fiscal crises.  Even under relatively optimistic GDP growth assumptions of 3.4-3.6% over the next several years, without entitlement reform and serious spending cuts the U.S. will end up borrowing itself into an insurmountable hole.  Compare this scenario to that of the German government, according to a weekend article in the FT, which appears cognizant of fiscal risks and is committed to maintaining their current account surplus and a balanced budget thereby effectively putting a “brake” on government borrowing.  German politicians appear willing to sacrifice short-term economic growth for the sake of long-term fiscal balance.  While there have not been consequences yet, the U.S. leadership’s inability to swallow short-term pain in the form of less growth and position the country for long-term fiscal sustainability is in stark contrast to the budgetary restraint exercised by German leadership.  Both countries have among the lowest borrowing costs in the world today, but as we have seen with other countries that have let their debt levels grow unchecked, borrowing costs can rise significantly when debt levels become unsustainably high and investors feel that a country will not be able to honor its financial obligations.