For the men and women who guide the global economy, Toronto is sliding from memory.
In 2010, under the chairmanship of Prime Minister Stephen Harper, leaders from the Group of 20 leading economies met in Canada’s largest city, agreeing on specific debt-and-deficit targets.
The commitment was considered a victory for fiscal conservatives such as Mr. Harper, German Chancellor Angela Merkel and British Prime Minister David Cameron.
The Toronto Summit was less than three years ago, but the ideas that were in ascendancy then suddenly seem out of step with the times.
Ahead of a meeting of G20 finance ministers and central bank governors on the weekend, Finance Minister Jim Flaherty foreshadowed a showdown between advocates of fiscal targets, like Canada, and the United States, which wants the world’s economic policy makers to focus squarely on short-term growth. The Americans won the battle.
The G20’s statement contained no trace of hard fiscal targets, saying only that “maintaining fiscal sustainability in advanced economies remains essential,” while pledging “medium-term fiscal strategies” later this year.
“The language could have been stronger,” Mr. Flaherty said on a conference call with reporters after the G20 meeting. “There is more work to be done in terms of targets.”
“Austerians,” as the champions of fiscal prudence are called, perhaps a little uncharitably, are in retreat because an emphasis on deficit cutting has failed to generate a convincing recovery.
The International Monetary Fund last week cut its growth outlook for 2013 to 3.3 per cent from 3.5 per cent and left its forecast for next year unchanged at 4 per cent, not especially strong. The feeling now is that one of the reasons the global economy is labouring is that too many countries moved too quickly to balance the books.
“Hard [fiscal] targets lead to silly decisions,” said Susan Schadler, a senior fellow at the Centre for International Governance Innovation and the former deputy director of the IMF’s European department.
Governments that made a virtue of budget cuts now preside over some of the world’s weaker economies. The combined gross domestic product of the euro zone is on pace to contract for a second consecutive year, while Britain has been in and out of recession since 2010.
Emblematic of the shift away from hard fiscal targets is the frenzy generated last week by the publication of an academic paper debunking earlier research that suggested economic growth weakens substantially once a country’s public debt surpasses 90 per cent of GDP.
The latter conclusion was made in 2010 by economists Carmen Reinhart and Kenneth Rogoff. Politicians such as British Chancellor of the Exchequer George Osborne embraced the findings as intellectual backing for their policies. A team of economists at the University of Massachusetts, Amherst, discovered Profs. Reinhart and Rogoff miscalculated – their data actually show that economies grow at a pace of 2.2 per cent after passing the 90-per-cent mark.
“There is a question of whether it’s the debt level that leads to the low growth, or the low growth that leads to the increase in debt,” David Lipton, the International Monetary Fund’s first deputy managing director, told an audience in Washington Saturday. “Now that people have looked at this paper, when one looks at the consequences of being in the 60-to-90 range, or being in the 90-plus range, it doesn’t seem to us to be such a discontinuity.”
For Mr. Flaherty, the argument over austerity versus stimulus is an oversimplification of what the G20 and the IMF are attempting to achieve. Mr. Flaherty called for a “balanced approach,” arguing that Canada is showing the way by promising to eliminate its budget deficit while at the same time pledging infrastructure spending that should add to GDP.
The push for hard fiscal targets isn’t over. Mr. Flaherty said the matter will be decided by G20 leaders when they meet in St. Petersburg, Russia, in September. Asked if Canada would get behind a German proposal for a debt target of 60 per cent of GDP, he said: “That target, or a better one.”