Domestic and Foreign Debt: Global Projections to 2050

Transcription

1 Domestic and Foreign Debt: Global Projections to 2050 John L Perkins National Institute of Economics and Industry Research, Melbourne. Project LINK, 26 October 2011

2 Outline Long term model features Government debt to countries Demographic changes - population ageing Effect of demographic changes to 2050 project deficits without demographics project deficits without demographics difference obtained is effect of demographics Foreign debt to countries model results give cumulative current account deficits coal, oil and natural gas Policy issues

3 Key questions Domestic How much will population aging affect government budgets in 2050? Which countries will be most affected? Foreign How much will fuel resource prices and resource depletion affect current account balances to 2050? Which countries will be most affected?

4 Population projections World population starts to peak at over 9 bill. in 2050 Developed countries: low to negative growth China: low to negative growth Less developed countries: moderate growth Africa: moderate to high growth 1980 Africa 9% of world total 2050 Africa 19% of world total

5 Population by region Region North-America Western Europe Eastern Europe Other Devel. Countries China Latin America, Caribb n South and East Asia West Asia & Mid. East Africa Least devel. countries World

6 Population growth Region North-America Western Europe Eastern Europe Other Developed Countries China Latin America & Caribbean South & East Asia West Asia & Middle East Africa Least developed countries World

7 Population Age 0-14 Country Brazil China Germany Greece Indonesia Italy Japan Nigeria United Kingdom United States

8 Population Age 65+ Country Brazil China Germany Greece Indonesia Italy Japan Nigeria United Kingdom United States

9 Government debt The primary deficit (excludes interest payments and receipts): P = X R X is government expenditure, R is government revenue. The change in government debt: Δ D = P + r D The IMF s World Economic Outlook data contain series consistent with this. The value of r can be calculated implicitly.

10 Government debt to GDP Debt change as shares of GDP: ΔD /Y = P/Y + r (D/Y) Change in the debt share of GDP: Δ (D/Y) = P/Y + (r g ) D/Y where g is nominal GDP growth. From this it can be seen that if r>g the debt is not sustainable.

11 Country Deficit, Debt and Interest, 2010 Interest rate on debt r Nominal GDP growth g Exp ture % of GDP X/Y Revenue % of GDP R/Y Primary Deficit % of GDP P/Y Debt % of GDP D/Y Greece Japan Italy United Kingdom United States Germany Brazil Indonesia Nigeria China

12 Projecting debt Debt is assumed to stabilise in the long term. Expenditure and revenue grow with GDP, with adjustments to bring debt to stability by x = α x + g r = α r + g where x and r are the rates of change, g is GDP growth and α x and α r are the adjustment factors.

13 Deficit, Debt and Interest, 2050 Country Interest rate on debt r' Nominal GDP growth g' Primary Deficit % of GDP P'/Y Debt % of GDP D'/Y Greece Japan Italy United Kingdom United States Germany Brazil Indonesia Nigeria China

14 Including demographics The equations for the rates of change of are modified as: x = g + α x + β x d r = g + α r + β r w where d and w are the rates of change of the dependent and working populations and β x and β r are elasticities. Dependent: 0-14, 65+ age groups. Working: age group. Assumption: β x = 0.5 and β r = 0.3.

15 Demographics and government deficits, 2050 Country Expenditure % of GDP X'/Y Revenue % of GDP R'/Y Primary Deficit % of GDP P'/Y Difference in Deficit dp/y (Revenue required) Greece Japan Italy United Kingdom United States Germany Brazil Indonesia Nigeria China

16 Policy implications Demographics worsen debt in countries already in debt Substantial increases in tax revenue required: 5-12% of GDP The higher government expenditure is, higher the requirement Solutions: more targeted expenditures, means tests more equitable taxation «ref: declining utility of income «declining marginal propensity to consume with income carbon tax

17 Foreign debt Current account balance, exports, imports, net income from abroad and net current transfers. CAB = X M + NY NCT Net foreign assets, equity investments and valuation effects CAB = Δ NFA + Δ E V Cumulative current account balance NFA' = Σ CAB

18 Projecting trade deficits Considerable error margin difference between exports and imports magnifies error cumulative deficit compounds error Highly assumption dependent low growth: 1-2 % by 2050 high fuel use / GDP reduction: 3 % Declining fuel reserves use less fuel import more

19 Cumulative trade balance coal, $trillion Country United States Russia China Australia India South Africa Japan

20 Cumulative trade balance oil, $trillion Country United States Russia China Canada India Japan Saudi Arabia Iraq Iran OtherWest Asia

21 Cumulative trade balance gas, $trillion Country United States Russia China Canada India Indonesia Japan Korea Iran Other West Asia

22 Policy issues National policies, e.g. resource rent tax, redistribute wealth between regions Geographical distribution of natural resources highly inequitable International solutions required Global Economic Co-ordinating Council? Need for greater transparency in resource transactions International carbon tax/resource rent tax levied by resource exporters agreement by small number of countries required global fund to mitigate climate change

23 Results National Institute of Economic and Industry Research, Melbourne, Australia.