Fiscal Power Rankings
Students at Stanford University, under the guidance of Comeback America Initiative (CAI) CEO and CRFB board member David Walker, have developed a Sovereign Fiscal Responsibility Index (SFRI) in an attempt to compare the quality of fiscal policy across different countries. The study, unsurpringly, does not contain good news for the US.
The SFRI uses three broad categories of criteria: fiscal space, fiscal path, and fiscal governance. In other words, how much room a country has to borrow, where the debt is heading, and how well the country can manage its debt. The first two criteria are relatively straightforward, but their assessment of fiscal governance includes a huge variety of measures, such as the presence of an independent forecasting body, the enforceability of fiscal rules, and the transparency of a country's budget.
The study compares 34 countries, consisting of mostly OECD countries and the BRICs (Brazil, Russia, India, and China). On the total measure of fiscal responsibility, the U.S. comes in 28th. Ouch.
We have serious problems in all three areas. Most alarmingly, they predict that the U.S. would reach its capacity to borrow in sixteen years--in the year 2027, based on an IMF estimation of how much debt the U.S. can borrow before the markets make the debt unsustainable. Obviously, reasonable people will disagree as to exactly what this number is. Nevertheless, on all three measures, we rank in the neighborhood of some of the most fiscally troubled countries in the study--including Italy, Portugal, and Ireland.
The U.S. is almost at the "danger" line of about 50 percent fiscal space discussed in the report. They chose this line based on the fact that many countries that are below it are under the most "fiscal scrutiny." About six countries are below this point--including Japan, Belgium, Ireland, Portugal, Italy, Iceland, and Greece. This line is more an observation about where the countries in the most serious trouble are.
One interesting note they include is that if the U.S. enacts a fiscal plan as ambitious as the Fiscal Commission's proposal, the U.S. would jump to eighth in the rankings--since it would not reach its debt capacity anytime in the foreseeable future and process reforms in the proposal would significantly improve fiscal governance.
The SFRI is just one way to measure the quality of a country's fiscal responsibility and people may disagree on the metrics used, but it is an indication of where we are compared to other advanced and emerging countries. If we can develop a fiscal plan, our outlook would look a lot brighter.