This document summarizes a slideshow comparing the Greek and US budget crises. It finds that both countries had government deficits over 12% of GDP in 2009. While the US debt is currently lower than Greece's, its finances have deteriorated more rapidly. The document analyzes spending, taxes, interest payments, and the need for fiscal reforms. It concludes that the US needs to reform taxes and spending before the next recession or risk unsustainable debt growth.
1. Free Slides from
Ed Dolan’s Econ Blog
http://dolanecon.blogspot.com/
The Greek Budget Crisis:
Some Comparisons with
the United States
Post prepared March 7, 2010
Note: This slideshow has been updated as of
April 4, 2013. Follow this link for the updated
version:
http://www.slideshare.net/dolaneconslide/why
Terms of Use: You are free to use these slides as a resource in your economics classes together with whatever
-hasnt-the-us-become-another-greece
textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to
Economics, from BVT Publishers. Check Ed Dolan’s Econ Blog regularly for more slides like these.
2. Greek Budget Crisis Threatens Euro Area
With a government deficit over
12 percent of GDP and total
government debt of more than
100% of GDP, Greece has the
worst fiscal policy performance
in the European Union
Greece is a member of the euro
currency area, so it cannot
devalue its currency or resort to
inflation to escape the crisis
A default by the Greek
government would threaten
financial stability in all euro area
countries
Source: PDClipart.org
Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
3. What can the US learn from the Greek crisis?
The United States also faces
unusually high government
deficits and debt
How do the two countries
compare in terms of key fiscal
policy indicators?
Does the Greek budget crisis
hold any lessons for the United
States?
Source: PDClipart.org
Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
4. Deterioration of Government Finances: The Deficit
In 2009, both countries had
government budget deficits of near
than 12 percent of GDP
The United States had a
government surplus as recently as
2000
Its finances have deteriorated even
more rapidly than those of Greece
Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
5. Deterioration of Government Finances: The Debt
Greece entered the crisis with a
much larger government debt than
the United States
During the boom years of the mid-
2000s, Greece began to reduce its
debt burden, but progress was
reversed as the economy slowed
In the US, debt continued to grow
faster than GDP even during the
most prosperous years of the boom
Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
6. Analysis: Cyclical Component of Deficit
The cyclical balance measures the
difference between the actual
deficit and the deficit that the
country would have at full
employment
A negative balance (a cyclical
deficit) shows that the actual deficit
is greater than it would be at full
employment
In both Greece and the US, about
two percentage points of the total
deficit, as of 2009, was attributable
to the recession
Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
7. Analysis: Contribution of Spending to the Deficit
During the early 2000s,
government expenditures trended
downward in Greece, but upward
in the United States
In both countries, fiscal stimulus
spending added significantly to the
deficit in 2008 and 2009
On balance, rising expenditures
contributed a bit more to the
growing deficit in Greece than in
the US
Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
8. Analysis: Contribution of Taxes to the Deficit
The tendency of tax and nontax
revenues to rise during a period of
prosperity is an important automatic
stabilizer that helps control the
business cycle and keep fiscal policy
under control
In both Greece and the US, this
automatic stabilizer was weak.
Tax receipts were lower during the
boom years of the mid-2000s than
they were at the previous business
cycle peak in 2000.
On balance, falling tax receipts
contributed a bit more to growth of
the deficit in the US than in Greece.
Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
9. Interest Payments and Pressure for Reform
Interest payments are a much larger
contributor to the budget deficit in
Greece than in the US
In part, Greek total interest cost is
higher because debt is larger
In part, it is higher because Greece
does not enjoy the confidence of
lenders.
As of early 2010, Greece was paying
interest rates that were more than
twice as high as those paid by the
US government
Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
10. Greek Government Makes Painful Budget Reforms
As fear of a default rose in early
2010, Greece came under
enormous pressure to tighten fiscal
policy
A package of expenditure cuts and
tax increases is projected to
sharply cut the Greek budget
deficit in 2010 and 2011
No similar changes are in store for
US fiscal policy. Without tax or
spending changes, the US deficit
is expected to shrink only slightly
Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
11. Lessons from the Greek Crisis (1)
When lenders begin to doubt a country’s
solvency, interest rates and debt service
costs soar out of control
At that point, a government has only Fiscal reforms in Greece . . .
three choices: Salary cuts for
Default on its debt government workers
Monetize the deficit at the risk of Pension cuts
runaway inflation Tax increases
Undergo painful fiscal reforms The results . . .
As a member of the euro area, the Strikes
default and inflation options were not on Violent street
the table. Greece was pressured by its demonstrations
neighbors to choose reform, however
painful
Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
12. Lessons from the Greek Crisis (2)
The middle of a recession is the worst time to make fiscal reforms. Better to do it
during a period of prosperity
The US has time, but not much, to make reforms before the next recession comes
Without big changes in tax and spending policy, the debt is certain to grow out of
control, and it will be too late for relatively painless solutions
US debt projections
by the Congressional
Budget Office
With business as usual
With reforms that have been
promised, but not yet delivered
Posting P100307 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/