Rich countries need to work harder at cutting deficits

EDITORIAL

Financial Post, Daily: Ontario, Mon 19 Aug 96

The Bundesbank has warned the industrialized countries that they need to place more emphasis on reducing their deficits. The thrust of this warning is that the excessive financial demands of the G7 nations is straining the world capital markets. The German central bank pointed to the gap between savings and investments in the G7. When domestic savings are inadequate to meet financing needs, the G7 countries have to tap the savings of other countries. As the Bundesbank said, this runs counter to the expected role of the rich countries in supplying capital to the poorer countries to help them raise their living standards.

In fact, some of the emerging and developing countries have been setting an example to the G7 by raising their savings rates and cutting or eliminating their budget deficits. For example, between 1988 and 1993 an average of 35%-45% of gross domestic product has been saved in Malaysia, Indonesia, Thailand, South Korea and Singapore. This means they are more able to satisfy their own financing needs. A World Bank report, noted previously in this space, forecast that most developing country investment increases will come from higher domestic savings.

By contrast, the Bundesbank said that total gross public and private savings in the G7 countries fell to 19.5% of GDP in 1995 from about 23% in 1980. The financing deficit -- the gap between savings and investments -- is moving toward 1% of GDP. Within the G7, Britain, the U.S., Canada and Germany have a financing deficit.

France and Italy have gone from deficit to surplus. Japan has the highest financing surplus, 2.2% of GDP last year, although that is down from the 2.5% average for the period 1990-95.

The deterioration in personal savings in Canada is especially apparent. Among OECD-member countries, Canada ranks a dismal 11th in terms of personal savings as a percentage of after-tax household income. Among G7 nations, only the U.S. ranks lower, just behind Canada.

While several OECD countries have managed to boost their savings rates since the start of the decade, Canada's savings rate is lower than in 1990. This is yet another argument in favor of a cut in income tax rates.

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