Government debt sustainability in the age of fiscal activism [JP Morgan Economic Research]

• Developed market fiscal positions deteriorated by a massive 6.2%-pts of GDP between 2007 and 2010, while net debt skyrocketed almost 20%-pts
of GDP, reflecting the depth of the recession in a world of increased fiscal activism and dependence on asset prices for revenues.
• If solid growth is sustained, significant fiscal consolidation lies ahead. Ffiscal imbalances will be halved by 2013, lowering deficits to 4% of GDP.
• This large adjustment will leave deficits at elevated levels and not deliver debt sustainability. Our projected fiscal adjustment falls 2%-points of GDP short of achieving stable debt positions by the end of our forecast horizon in 2013. In the long run, increases in entitlement spending, which are estimated to rise by 7.6% of GDP from 2010-2050, pose a daunting fiscal challenge.
• Japan stands furthest from achieving sustainability in our 2013 forecast due to its high debt and low nominal GDP growth. The US will be much
closer given its better nominal growth outlook, but still fall short. The relatively small fiscal footprints of the US and Japan afford opportunities
to correct imbalances by raising revenues.


Government debt sustainability in the