By Alister Bull
WASHINGTON (Reuters) - President Barack Obama's budget for fiscal 2011 will run to several thick volumes when it is released February 1, but financial markets will trade off just a handful of its numbers.
Estimates for the U.S. debt and budget deficit will be under particular scrutiny. The following looks at why these numbers matter, and how they stack up against other countries:
IS A BUDGET DEFICIT ALWAYS BAD?
Living beyond your means is not good for households and not supposed to be good for countries either, but governments rarely manage to actually balance their budgets. The United States has only posted a budget surplus eight times since World War Two, most recently in 1999 and 2000. The federal deficit soared to a $1.4 trillion, or 11.2 percent of GDP, in fiscal 2009, from 3.2 percent in 2008, as the recession hit tax revenues and emergency government spending surged.
However, running a big deficit during tough economic times to boost growth and jobs might make sense if it meant more prosperity -- and revenue from taxes -- in the future. This was the argument employed by Obama when he signed a $787 billion emergency stimulus package in February 2009, which his White House says stopped the recession from getting much worse.
WHAT IS A SUSTAINABLE BUDGET DEFICIT?
If a balanced budget generally seems to elude policy-makers, how much of a deficit is acceptable in terms of investors and the general sustainability of a country's finances? That depends on how much investors are prepared to tolerate. A budget deficit generally means more government bond issuance, and if investors reduce their buying, or demand a higher yield to keep lending a country money, it puts a pretty hard limit on how big a deficit can be run.
The countries that founded the euro common currency in the early 1990s chose a maximum deficit of 3 percent of GDP as one of their qualification criteria. In addition, economists studying the fiscal future of the United States estimate that a budget deficit of 2-3 percent of GDP, in real inflation-adjusted terms, is consistent with a long-run target for the national debt of 60 percent to GDP.
DOES IT COME DOWN TO THE MATH?
The reason for that is arithmetic. As John Palmer, co-chairman of the Committee on the Fiscal Future of the United States, explains this is because in order to not keep adding to a given debt-to-GDP ratio once it is reached, it is important that the debt does not grow any faster than GDP.
"Thus, annual deficits of 3 percent of GPD are consistent with maintaining a stable debt-to-GDP ratio of 60 percent when nominal GDP is growing at 5 percent per year, since in such a case the debt will increase by 3 percent of GDP a year and the GDP by 5 percent -- and 3 percent is 0.6 of 5 percent."
HOW MUCH DEBT IS TOO MUCH?
No hard rules, but 60 percent of GDP is a target favored by the Committee on the Fiscal Future of the United States, whose findings are presented in a study from the National Research Council and National Academy of Public Administration.
They say that anything less than 60 percent is not politically feasible because it would demand cuts in government programs that no lawmaker could support. Anything more than 60 percent and investors will worry about the sustainability of the country's finances, potentially undermining the dollar.
As it happens, a 60 percent debt-to-GDP ratio was also chosen by the founders of the euro common currency zone.
On this measure, the U.S. national debt is too high. The 2010 mid-term U.S. government budget estimates the debt will be 66 percent in fiscal 2010, compared with 40 percent in 2008 as the recession took its toll.
In addition, the debt to GDP ratio is seen climbing steeply without action. But Obama has pledged to impose long-term fiscal discipline, in part by reforming healthcare which is one of the main drivers of the debt and deficit.
IS EVERYTHING IS RELATIVE?
Cross-country comparisons are complicated because different governments measure their debt levels in different ways. One common benchmark is estimates calculated by the International Monetary Fund in its semi-annual World Economic Outlook.
These peg U.S. government debt at a much higher 94 percent of GDP in 2010. Even so, this doesn't seem so bad compared with some other advanced economies. Japan's debt to GDP ratio is projected by the IMF to top 227 percent this year, while Italy's is seen at 120 percent.
That said, Germany's debt to GDP ratio is projected to be 84 percent this year by the IMF, with Britain and France both expected to notch 82 percent.
DOES IT MATTER - WHEN YOU HAVE THE DOLLAR?
These ratios don't seem to matter an enormous amount to investors in U.S. debt at the moment. The dollar is the world's effective reserve currency, and there seem to be plenty of investors around the world who were still willing to buy U.S. government bonds during the financial crisis as a safe haven.
However, that situation can change, and if an investor is looking for an excuse to sell a country's assets, an unsustainable debt burden is a good one.
(Reporting by Alister Bull in Washington; Editing by Vicki Allen)