The G-10 estimates that, adjusted for inflation, average interest rates in the industrialized countries have risen to 4% from 3% over the past 35 years. Over the same period, savings rates have declined by nearly 5% of national income.
High government borrowing has been mostly to blame for this decline, the G-10 paper says.
The study was released at a meeting in Washington of finance ministers and central bank governors. (The G-10 apparently now includes the G-7 -- the U.S., Canada, Japan, Britain, Italy, Germany and France -- plus Belgium, the Netherlands, Sweden and Switzerland, which really makes 11, and Saudi Arabia, which makes 12. In any event, they're all big players.)
``Cutting public sector deficits will unambiguously increase national saving and thus tend to put downward pressures on world real interest rates,'' the study says. It recommends that government debt be reduced as a proportion of national income and that reductions take place now before public pension plans and health care systems face further demands from aging populations.
So far as pension plans are concerned, the report recommends against early retirements which only put more pressure on the funds, and a move toward fully funded plans as opposed to pay-as-you go schemes. (The folly of adopting the pay-as-you-go method is apparent in the funding crisis facing the Canada Pension Plan; see below.)
For Canada, the dimension of the debt problem is a real concern. The ratio of net public debt of the G-10 countries as whole doubled, to 41.3%, between the 1970s and 1994. But in Canada, the government estimates the federal debt at 73.4% of GDP in 1996-97.
Desautels referred to Ottawa's plan to to cut the deficit to 3% of GDP, or $24.3 billion, in fiscal 1996-97. The debt-to-GDP ratio would then begin to recede.
Even if the government were content simply to stabilize the debt-to-GDP ratio at the 73% level in 1996-97 it would require an operating surplus (excluding debt-service costs) of about $23 billion.
But if the government wanted to restore the debt-to-GDP ratio to the 50% level of 10 years ago, Desautels said it would need operating surpluses relative to GDP over the next 10 years to average just under 5%. Translated into dollars, this would amount to close to $60 billion by the year 2006, assuming the economy grows over this period at a rate of about 4.5%.
This shows what a stiff fiscal challenge Ottawa faces. As a member government of the G-10, the high expectation is that Ottawa will take the message in the G-10 report to heart.
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Revised: May 10, 1996
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