The world's major developed countries are admitting they have a debt problem. The next step is convincing their sponsors in the international bond market that they are serious about controlling their habit.
In an acknowledgment that words are not enough, Britain's government said Wednesday it will turn into law its promise to halve the biggest budget deficit in the Group of 20 nations in four years.
At the same time, U.S. President Barack Obama, whose stimulus spending threatens to increase the debt of the United States to the same size as its gross domestic product, said in a television interview he understands that failure to control expenditures risks dropping the world's largest economy back into recession.
While the U.S. administration is still considering tax cuts to encourage companies to hire, "it is important to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession," Mr. Obama told Fox News in an interview from Beijing, where the President met Chinese leaders on their own soil for the first time.
The Chinese government happens to be one of the biggest buyers of the debt Mr. Obama's government is issuing to pay for its economic recovery program.
The U.S. President's willingness to concede publicly that there are limits to how much he can spend is an example of how governments are trying to earn credibility with the investors underwriting their legislative agendas.
The effort is extremely important. If purchasers of sovereign debt lose confidence in countries' ability to pay, they will demand higher yields on the bonds they buy, making it even more difficult for governments to square their obligations.
"There is a day of reckoning coming," said Paul Vaillancourt, director of portfolio strategy at Franklin Templeton Managed Investment Solutions in Calgary. "You cannot be a debtor nation without having to deal with that eventually."
As the dust settles from the G20's frantic efforts to revive the global economy over the past year, investors, voters, credit rating agencies and the leaders themselves are starting to get a clearer picture of the bill for that unprecedented spending.
Britain's deficit is set to expand to 13.2 per cent of its GDP in 2010 from 11.6 per cent in 2009, which will push its gross debt to 82 per cent of the economy, according to the International Monetary Fund.
In the United States, the budget shortfall will fall to 10 per cent of GDP in 2010 from 12.5 per cent this year, but the debt-to-GDP ratio would still be almost 94 per cent.
Japan is in even worse shape. Its debt is on track to grow to 227 per cent of GDP next year and 247 per cent in 2014, leaving the country's government little room to manoeuvre.
"Any small increase in the nominal level of rates [of public debt to GDP]will be extremely difficult to handle in the budgets," Angel Gurria, secretary-general of the Organization for Economic Development and Co-operation, said in Tokyo yesterday, according to the Reuters news agency.
Credibility is important because the economies of most G20 countries remain too fragile for finance ministers to begin unwinding stimulus measures. Earlier this month in Scotland, ministers and central bank governors reiterated their pledge to maintain spending for the foreseeable future.
Earning the trust of investors and constituents is less challenging for some.
Canadian Finance Minister Jim Flaherty, who has run up a deficit of more than $50-billion fighting the recession, is so far relying on his reputation as a fiscal conservative to back his commitment to rebalance Canada's budget as soon as possible.
"We know how to run surpluses and we will," Mr. Flaherty told reporters yesterday in Ottawa, citing the $40-billion of debt he paid off before the crisis struck.
So far, Mr. Flaherty has shied away from putting that pledge in writing, unlike what his British counterpart Alistair Darling now promises to do and the German government already has done.
Mr. Obama's decision to show increased concern about his country's deficit reflects widespread skepticism in Washington and elsewhere. His pledge to expand health care without increasing the overall cost to the budget tests credulity, and he is promising to retain half of former president George W. Bush's tax cuts without paying for them, said Phillip Swagel, a former chief economist at the Treasury Department.
"They have fiscal responsibility on the cover of the budget, but nothing inside the budget," said Mr. Swagel, who is now a visiting professor in the business department at Georgetown University in Washington.