Domestic and Foreign Debt: Global Projections to 2050 John L Perkins National Institute of Economics and Industry Research, Melbourne. Project LINK, 26 October 2011
Outline Long term model features Government debt to 2050-186 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 2050-79 countries model results give cumulative current account deficits coal, oil and natural gas Policy issues
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?
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
Population by region Region 2010 2030 2050 North-America 344.1 409.1 476.1 Western Europe 421.2 443.8 443.5 Eastern Europe 278.8 269.7 241.9 Other Devel. Countries 167.1 166.5 149.8 China 1341.4 1465.0 1431.6 Latin America, Caribb n 565.9 678.0 708.7 South and East Asia 2088.0 2657.8 2985.8 West Asia & Mid. East 606.0 791.9 903.0 Africa 859.1 1319.4 1777.7 Least devel. countries 380.9 638.5 931.2 World 6818.1 8422.4 9403.9
Population growth Region 2010 2030 2050 North-America 1.0 0.8 0.7 Western Europe 0.5 0.2-0.1 Eastern Europe -0.4-0.2-0.6 Other Developed Countries 0.3-0.2-0.7 China 0.6 0.4-0.2 Latin America & Caribbean 1.3 0.8 0.1 South & East Asia 1.5 1.1 0.4 West Asia & Middle East 1.8 1.2 0.5 Africa 2.4 2.0 1.4 Least developed countries 2.6 2.5 1.8 World 1.2 1.0 0.4
Population Age 0-14 Country 2010 2030 2050 Brazil 27.0 15.6 10.1 China 18.0 15.8 10.2 Germany 14.0 12.4 10.7 Greece 14.0 15.4 11.2 Indonesia 28.0 21.9 13.2 Italy 14.0 11.6 11.0 Japan 13.0 10.8 10.9 Nigeria 43.0 42.0 36.7 United Kingdom 18.0 18.7 18.8 United States 20.0 19.7 19.8
Population Age 65+ Country 2010 2030 2050 Brazil 7.0 17.4 30.0 China 8.0 26.5 40.3 Germany 20.0 34.5 43.0 Greece 19.0 30.4 35.9 Indonesia 6.0 16.3 26.5 Italy 20.0 27.4 33.2 Japan 23.0 35.0 46.4 Nigeria 3.0 5.5 6.2 United Kingdom 16.0 24.5 26.5 United States 13.0 22.7 24.8
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.
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.
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 8.4 5.2 44.7 39.7 5.0 142.0 Japan 1.8 0.2 37.5 31.7 5.8 117.5 Italy 5.4 3.2 45.1 46.2-1.1 99.6 United Kingdom 5.0 4.8 41.5 36.5 5.1 69.4 United States 3.6 4.5 37.3 31.2 6.1 64.8 Germany 5.3 2.3 42.2 43.0-0.8 53.8 Brazil 12.5 11.1 28.5 31.0-2.5 40.2 Indonesia 5.3 14.5 14.4 14.9-0.6 26.9 Nigeria 2.6 19.9 23.7 21.0 2.7 18.3 China 7.1 12.8 17.0 16.6 0.5 17.7
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 2050. 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.
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 4.6 5.0-2.9 232.9 Japan 1.8 2.5-0.9 211.6 Italy 4.2 4.8-3.4 25.4 United Kingdom 4.1 5.0-0.3 137.0 United States 3.6 4.6 0.7 152.9 Germany 4.2 4.7-1.8 15.0 Brazil 5.1 5.8-1.9-42.7 Indonesia 4.2 6.2-0.7-10.0 Nigeria 2.6 5.7 1.5 35.6 China 4.4 6.0 0.2 13.9
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: 15-64 age group. Assumption: β x = 0.5 and β r = 0.3.
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 48.3 40.8 7.5 10.4 Japan 42.8 31.0 11.8 12.7 Italy 49.9 45.1 4.8 8.2 United Kingdom 44.5 37.0 7.5 7.7 United States 39.8 31.9 7.9 7.1 Germany 52.1 39.3 12.7 14.6 Brazil 31.2 29.9 1.3 3.2 Indonesia 15.4 14.6 0.7 1.4 Nigeria 22.3 21.9 0.4-1.1 China 22.9 15.0 8.0 7.8
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
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
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
Cumulative trade balance coal, $trillion Country 2010 2030 2050 United States 0.01 0.27 1.18 Russia 0.03 0.36 2.30 China 0.06-0.34-8.03 Australia 0.15 0.87 3.59 India -0.04-0.22-0.85 South Africa 0.03 0.24 1.07 Japan -0.13-0.63-0.34
Cumulative trade balance oil, $trillion Country 2010 2030 2050 United States -2.10-12.86-30.83 Russia 1.01 3.26 1.92 China -0.53-6.12-15.64 Canada 0.14 1.78 6.67 India -0.38-2.77-7.42 Japan -0.85-3.68-7.75 Saudi Arabia 1.40 10.01 29.18 Iraq 0.18 3.14 14.57 Iran 0.47 4.34 14.64 OtherWest Asia 0.68 3.95 9.42
Cumulative trade balance gas, $trillion Country 2010 2030 2050 United States -0.29 1.06 12.34 Russia 0.16 1.37 6.16 China -0.02-0.95-17.75 Canada 0.25-0.55-3.87 India -0.02-0.41-2.13 Indonesia 0.08 0.51 1.74 Japan -0.26-1.23-3.13 Korea -0.11-0.68-1.83 Iran 0.01 0.55 3.94 Other West Asia 0.13 1.50 7.67
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
Results http://www.nieir.com.au/research_centre/project_link National Institute of Economic and Industry Research, Melbourne, Australia. jperkins@nieir.com.au