Source: International Monetary Fund staff estimates based on the April 2010 World Economic Outlook. Chart taken from “Navigating the Fiscal Challenges Ahead.”That’s from an International Monetary Fund report released today titled “Navigating the Fiscal Challenges Ahead.” The takeaway from this chart is that the surging public debt in advanced countries is driven mostly by huge declines in taxes as a result of less economic activity in the last few years.
From the report:
Of the almost 39 percentage points of GDP increase in the debt ratio, about two-thirds is explained by revenue weakness and the fall in GDP during 2008-09 (which led to an unfavorable interest rate-growth differential during that period, in spite of falling interest rates; see pie chart below). The revenue weakness reflected the opening of the output gap, but also revenue losses from lower asset prices and financial sector profits. Fiscal stimulus — assuming it is withdrawn as expected — would account for only about one-tenth of the overall debt increase. This is somewhat more than the contribution of direct support to the financial sector. Finally, a fairly sizable component arises from lending operations in some countries — Canada, Korea, the United States — involving student loans, loans for consumer purchases of vehicles, and support to small and medium enterprises — arguably in response to the crisis. While structural spending pressures unrelated to the crisis are also projected to continue in the medium term, including for health and pensions, these are projected to be increasingly offset by measures from 2011 onwards.
Here is a related chart on the United States from last year. It shows how much the recession has contributed to the country’s widening deficit.