Last week’s US GDP data, which revealed the first three-month period of growth in five quarters, also showed the extent to which economic growth has become dependent on government spending. Increases in residential construction and the automobile component of durable goods orders were the two key positive components of private sector demand and both can be directly linked to policy stimulants: tax credits for homebuyers, bailouts for auto finance companies and 'cash for clunkers' for car buyers.

The data report told in microcosm the story of the last 18 months. Governments worldwide have stepped in to counteract falling private sector demand, bailing out banking systems and massively increasing their own indebtedness as a result.

According to the IMF’s latest World Economic Outlook, the fiscal deficit of G7 members is forecast to average 8% in 2009 and 2010. Japan, the US and the UK are set to record double-digit deficits this year (-10.5% in Japan, -11.6% in the UK and -12.5% in the US), with 2010 showing little improvement (the IMF forecasts a general government balance for next year of -10.2% in Japan, -13.2% in the UK and -10% in the US).

IMF – General Government Balance (% of GDP) – G7 Countries

A similar trend of worsening deficits is evident in the IMF’s forecasts for certain Eurozone members, with Ireland and Spain particularly badly hit. Ireland has suffered a dramatic reversal of its “Celtic tiger” status following the forced bailout of key banks last autumn and the deflation of a huge property bubble, while Spain is suffering from large rises in unemployment and a collapsing construction sector.

IMF – General Government Balance (% of GDP) – Key Eurozone Members

A look at the stock of debt (rather than the rate at which it is being accumulated) reveals sharp rises in overall indebtedness, as well as some “problem” countries.

IMF, Eurostat – Gross Government Debt To GDP (%)

The IMF’s forecast for G7 gross debt to GDP (the first table) shows a steadily rising trend in all seven countries, a near-doubling of the debt burden over four years in the UK, and a debt stock of well over 100% of GDP in Italy and over 225% in Japan.

The Eurostat figures in the second table are only historical but reveal that by 2008 no fewer than seven of the 10 euro member countries listed were in breach of the original Maastricht treaty limit of a debt cap at 60% of GDP.

The European situation is set to deteriorate further, too. According to a recent European Commission report, the gross debt-to-GDP ratio for the EU as a whole will reach 100% as early as 2014 without a reorientation of fiscal policy.

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