Much has been written about how the developed world must tackle its structural budget deficits. But the link that remains to be properly recognised is that the counterparts to those “unsustainable” public-sector budget deficits are equally “unsustainable” corporate-sector surpluses.
The conventional wisdom believes that the current sovereign debt crisis is the result of governments having been too profligate. But it is not that governments have been spending “too much” that is the problem; it is that corporates have been spending “too little”. Moreover, because this corporate saving is
the main counterpart to the government’s borrowing, until companies start to spend again, the burden of fiscal adjustment will have to fall on cutbacks in public services and higher personal taxation. It is time to shift the debate away from talking about the fiscal position, and focus instead on whether it is a shift in corporate behaviour that is responsible for the fiscal mess in the developed world.