G20 deficit cuts 'a fantasy' (G-20 sounds like Geithner-20)

ABC News
By economics correspondent Stephen Long, staff

Commitments by world leaders from the G20 group of major economies to cut spending will undermine economic growth and risk scuppering recovery, experts say.

Countries have agreed at least to halve their budget deficits within three years and to stabilise the level of government debt by 2016.

But the communique from their meeting in Toronto leaves nations free to do so in their own way and at their own pace.

It is a compromise between the United States, which was pushing to maintain fiscal stimulus, and European nations such as Germany and Britain that wanted radical spending cuts.

The statement from the summit talks about the risk that synchronised cuts to government outlays will undermine the recovery.

Yet in vague terms, it also warns that failure to consolidate government finances could undermine growth.

Joseph Stiglitz, a Nobel Laureate economist and the renegade former chief economist at the World Bank, turned against the IMF's prescriptions of fiscal austerity as the answer to economic ills.

He says it is a fantasy to believe that cutting deficits will restore the global economy. "I think it's fantasy. I think it reflects the excess optimism about the recovery," he said. "There are almost no successful cases of countries cutting back on their expenditures as a way of getting out of the kind of economic downturn. "There are many cases where these kinds of austerity measures have led to downturns [turning] into recessions - recessions into depressions."

Risk analyst Satyajit Das agrees, but questions how countries will finance growth. "I think fundamentally Stiglitz is right in the sense that if you actually withdraw the fiscal stimulus, growth will go down," he said.

"But what Stiglitz does not answer is how, in heaven's name, the governments are going to keep financing it. "People forget that governments can only do one of two things which is tax and spend or borrow and spend.

"None of the politicians, none of the policymakers in any of the developed worlds or the G20 want to face up to the fundamental fact that we've had a period of debt-fuelled growth and that debt-fuelled growth is going to be very difficult to sustain in the future."

Banks feared that the G20 meeting would mandate a global tax on finance to make banking pay for future bailouts, but that plan was scotched.

The meeting did agree on new capital requirements for banks to be put in place within two years as an understandable and perhaps necessary response to the financial crisis.

But like the plans to rein in government debt, it could undermine economic growth by constraining lending