The All-Important Deficit Targets

Japan is considering legislation to impose deficit-targets, according to an article in The Wall Street Journal.  With their debt nearing 200% of GDP and concerns that they may follow countries like Greece in having a fiscal crisis, lawmakers have been proposed a number of possible ways to show the bond-market they are serious about getting their debt under control. 

A number of potential targets have been suggested, including one to cut the primary deficit (the deficit excluding interest payments) in half by 2016 and reach surpluses by 2021, and another to cut the overall deficit from the current 9.4% of GDP to 6% of GDP by 2016, then to 3% of GDP by 2021. 

Japan appears to understand the potential announcment effect of enacting credible budget targets (and a plan to reach them). According to the article, "if the market begins to doubt Japan's ability to pay down its debt, it could lead to a sell-off in Japanese government bonds that will cause long-term interest rates to rise, in turn stunting economic activity."

We, of course, have our own debt problems -- which could lead to a crisis if not addressed. A fiscal goal would represent a positive step in averting one. We recommend that goal be to stabilize the debt at 60 percent of GDP by 2018, but other goals might do the trick. For example, other organizations have suggested different goals or timelines. And both the Obama Administration and Senator Kent Conrad have suggested bringing the deficit down to 3% of GDP by 2015 (although only Conrad's proposal would get there).

The important thing is to create a target that is ambitious enough to bring our debt under control, but realistic enough to be believable. And then comes the hard part of meeting our goal -- something we mustn't fail.

As Japan has shown, the longer you wait, the harder deficit reduction gets, and the more you damage your economy in the interim. We need to set debt targets now and make plans that will actually reach those targets, so we can take action once the economy is on solid footing.