A new study names Australia and New Zealand the leaders in “fiscal responsibility” among top industrial nations while the United States plumbs the lower rankings at number 28.
The Sovereign Fiscal Responsibility Index, developed at Stanford University, said mounting indebtedness and budget deficits put the United States in a class with troubled economies like Ireland (number 29) and Italy (27).
But Australia and New Zealand, followed closely by Estonia, Sweden, and China, stand at the top for their capacity to maintain strong fiscal balances decades into the future.
“There is great potential for a fiscal crisis in many countries, including the United States, if they don’t start addressing the structural deficit challenges that lie ahead,” said David Walker, the former chief US government auditor who oversaw the creation of the index.
“The index also shows that countries that engage in dramatic and comprehensive reforms can dramatically improve their fiscal prospects,” said Walker.
“New Zealand ranks number two after engaging in such reforms in the early 1990s when it faced a currency crisis.”
The SFRI weighed 34 members of the Organization of Economic Co-operation and Development and the four rising “BRIC” economies -- Brazil, Russia, India and China -- on a mix of current fiscal strength, fiscal sustainability over the next 40 years, and transparency in fiscal governance.
Unsurprisingly, countries with high reserves, low debt and balanced budgets generally ranked high.
Powerful economies with high sovereign debt levels like the US, Japan, Germany, and France were all in the bottom third.
Britain, which has slashed spending to work its way out of fiscal crisis, was ninth.
Supported by Walker, who was US comptroller general from 1998-2008, the study is likely to feed into pressures on the Barack Obama administration to cut spending in order to move toward a balanced budget.
Indeed, Walker cited the conclusions of a recent high-level panel, the National Fiscal Responsibility and Reform Commission, to highlight the low US rank in the index.
In January, the commission recommended a mix of budget cuts, tax increases, and deep reforms to programs like social security to address the government’s troubling long-term deficit outlook.
If the commission’s conclusions were calculated into the US outlook, it would rank eighth on the index, Walker said.
“The US needs to engage in comprehensive and timely reforms to restore fiscal responsibility and sustainability and to avoid a debt crisis that would be felt around the world,” the study said.
“Countries such as Australia and New Zealand that have implemented strong fiscal rules have seen declining debt levels and reasonable government spending.”
“They reveal the power of good fiscal governance.”