ABSTRACT
Reducing budget deficits has become every politician’s obligation. Talk of balanced budgets, lower deficits and rehauling social services is at the centre of electoral debate in most countries. Strict deficit targets are the norm, from those in the Maastricht Treaty to the balanced budget target in the US. A change in the political climate justifies part of this emphasis, together with the rapid increase in the size of budget deficits and debts. Trends in the debt to GDP ratio have been striking: in 1980–95, the average gross public debt in industrial countries swelled from about 40 per cent to about 70 per cent of GDP. Most countries, including France, Germany, Italy, Japan, the Netherlands, Sweden and the United States, experienced roughly a doubling of their debt over this period. Among the highest debt countries, Belgium and Canada, with Greece and Italy, have debts near or over 100 per cent of GDP (OECD 1996 and IMF 1996). This raises questions of sustainability over the long term and the resultant economic effects on growth, employment and inflation. The success, or otherwise, of budget efforts, both globally and domestically, is fast becoming the crucial issue for bond market investors.
