Deficit worries trump fears of new recession

June 28, 2010 at 12:00a.m.

McClatchy Newspapers

TORONTO, Canada

Still concerned about slipping back into recession, world leaders signaled Sunday they have a new fear — that deficit spending they used to stimulate growth could produce a crippling debt crisis that also could stagger the world economy.

They pledged Sunday to cut deficits in half within three years, their fear of debt outweighing warnings from President Barack Obama that cutting back too quickly risks starving the economy just as its starting to recover.

The leaders of the world’s top 20 economies left wiggle room for each country to chart its own belt tightening course. But they left little doubt they want to start scaling back as rapidly as possible the deficit spending they used to stimulate a recession-stricken economy.

“Here is the tightrope we must walk,” said Canadian Prime Minister Stephen Harper, who pushed the deficit-cutting goal.

“To sustain the recovery, it is imperative we follow through on existing stimulus plans. At the same time, advanced countries must send a clear message that as our stimulus plans expire, we will focus on getting our fiscal houses in order.”

Obama noted the goal of cutting deficits, but tempered his support for that goal with a caution that growth and job creation must come first.

“In the United States, I’ve set a goal of cutting our deficit in half by 2013. A number of our European partners are making difficult decisions,” he said. “But we must recognize that our fiscal health tomorrow will rest in no small measure on our ability to create jobs and growth today.”

The group’s final statement said stimulus spending, along with financial regulations, helped to bring the world back from the deepest recession since the 1930s.

“Our efforts to date have borne good results,” said the group, which represents 85 percent of the world’s economy. “Unprecedented and globally coordinated fiscal and monetary stimulus is playing a major role in helping to restore private demand and lending.”

It added that the world has not yet fully recovered and still needs help.

“Serious challenges remain,” the leaders said. “While growth is returning, the recovery is uneven and fragile, unemployment in many countries remains at unacceptable levels, and the social impact of the crisis is still widely felt.”

At the same time, they signaled that the recent debt crisis in Greece was a reminder of the dangers of excessive deficits and debt.

“Recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, properly phased and growth-friendly plans to deliver fiscal sustainability, differentiated for and tailored to national circumstances,” the group said.

Specifically, the group recommended cutting deficits in half by 2013 as measured as a share of the economy and then stabilizing deficits at the lower levels by 2016.

European deficit hawks applauded the pact.

The Obama administration insisted the deficit target is not a problem for the U.S., saying the government already proposes deep cuts in the deficit.

Obama’s proposed budget would cut the deficit from roughly $1.5 trillion this year to $724 billion in 2014.