Government debt: a financial oil slick?

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Financial analysts, pundits and commentators have long warned of the likelihood ofWestern governments running into serious budget deficit problems by 2020, chiefly as a result of the rapidly ageing populations in this part of the world.The financial crisis that flared up in 2008 has only hastened the beginning of serious budget financing problems. 2010 is likely to be remembered as a significant turning-point for social-welfare policy in the developed world, as governments now confront some tough and daunting choices.

Apart from the underlying structural aspects, this squeeze on financing has become of even more paramount importance in the near term as a result of the rise in deflationary pressures in Europe and, to a lesser extent, the US. In recent weeks, political leaders have seemed to become obsessed with ‘budget risk’, encouraging them to rush through major spending cuts. It is almost as if they have been trying to outdo each other in implementing the most draconian austerity programme.This approach poses a serious threat to economic growth that is still tentative. Although it is very rare to be able to base investment decisions on cast-iron certainties, there seems no chance of avoiding ‘depression’ if governments decide to slash public-sector debt just as business and individuals are doing the same – the private sector has already been belt-tightening for the past couple of years. It is vital that public-sector deficits are retained, but which ones exactly? Finding the answer to this conundrum is crucial.