Finance Minister Jim Flaherty had urged his counterparts in the G20 group of developed and emerging economies to set hard targets on debt and deficit, but today’s communique from from finance officials gathered in Washington, D.C. contained no mention of specific fiscal benchmarks. Instead, the document, released after meetings on Thursday and Friday, simply reiterates that “maintaining fiscal sustainability in advanced economies remains essential.” It further states that developed countries, which include many debt-ridden eurozone members, should develop medium-term fiscal strategies by September, when the leaders of the G20 countries will convene in St. Petersburg, Russia.
G20 finance ministers and central bank governors met at the end of a week that saw a popular economic theory about debt and growth rates come under fire for mathematical errors. Noted Harvard economists Carmen Reinhart and Kenneth Rogoff had argued in oft-quoted research that government debt above 90 per cent of GDP stifles economic growth. Their calculations, however, were based on a faulty dataset, it emerged this week. The revelation comes at a time when many in crisis-battered Europe and the U.S. are questioning the wisdom of harsh austerity measures. The International Monetary Fund recently warned that excessively solicitous budget-slashing can hinder growth.
During a conference call with reporters, Flaherty reiterated his support for hard fiscal targets. “We in Canada support setting targets and then achieving them,” he said. The minister, though, added that picking specific benchmarks is “up to each country.”
Speaking to the media in Washington on Thursday, Bank of Canada governor Mark Carney said that the bank had used the Reinhart-Rogoff theoretical framework in its own modeling but that the 90 per cent target was never considered a relevant component of the two academics’ contribution. “I think what’s important is to recognize … the depths of the insights by Reinhart and Rogoff’s work, which capture a number of dynamics that have come to pass for countries coming out of major crisis,” the governor said.