Andrew Milligan on why US debt crisis is worse than Europe

In a piece written before super-committee failed to agree on $1.2 trillion of spending cuts, Standard Life Investments' head of global strategy explains why the fiscal situation in the US is worse than Europe.

The fiscal situation in the US is growing more serious, and forecasting that economy in 2012 depends on key decisions taken before the year end.

In some respects, the fiscal situation in the US is worse than in Europe. This might sound perverse, when Greece is defaulting and Italy could be downgraded. However, Europe’s problems largely relate to when and how to transfer income from one country to another.

IMF data suggests the net government debt/GDP ratio for the US has reached 73% this year, versus 69% for Europe. The US has a net borrowing gap this year of 10% of GDP, versus 4% for the euro area, while the structural deficit is 6% of GDP versus 3% for the Eurozone.

The IMF is worried − in its usual coded manner. In September, it warned the first priority for the US authorities is to commit to a credible fiscal policy that puts public debt on a sustainable track over the medium term, while supporting the near-term recovery.

For this, the fiscal consolidation plan should be based on realistic macroeconomic assumptions and comprise entitlement reform and revenue raising measures.

Words from economists and technocrats do not always curry favour with politicians. Important policy decisions approach.

Over the summer, the US Congress ‘covered itself in glory’ as it debated raising the debt ceiling, forcing Standard & Poor’s to conclude the US no longer deserved an AAA rating. An agreed way to ‘kick the can down the road’ was to set up a super-committee to decide on $1.2 trillion of spending cuts and tax rises.

If the committee fails to agree, certain spending programmes face automatic cutbacks. Their report will trigger debate on other important decisions – the 2% social security tax holiday ends on 31 December, for example.

Congress and president Obama face a dilemma. Failure to extend tax holidays could lower growth by 1%-2% in 2012 − not a good backdrop in an election year.