At the same time, there is great uncertainty surrounding fiscal policy as there is a political deadlock between the Democrats and the Republicans in Congress that may remain after the presidential election in 2012. The uncertainty has caused analysts to talk about the US economy facing a fiscal cliff next year. The concern applies on the one had to whether earlier income tax cuts and reductions in payroll taxes will be extended beyond the end of the year, and on the other hand is linked to the automatic expenditure cuts that will come into force at the turn of the year unless Congress can agree on long-term sustainable budget consolidation. All in all, these automatic tax increases and cuts in public expenditure entail a tightening during 2013 of 3–4 per cent of GDP. A further element of uncertainty is the result of the presidential election in November. If the results of the election are inconclusive and no party gains a clear majority, there is a major risk that the political deadlock will persist. The lack of credible budget solutions at present, and the low confidence in the political system’s ability to deal with the fiscal policy challenge, could led to companies and households beginning to act with greater caution. This would subdue growth in the world economy. We have given consideration to these risks in our forecast, but it is of course possible that the situation will be more problematic than we have assumed. Realistic to believe in an orderly resolution of the euro crisis?
4  “Debt and deleveraging: Uneven progress on the path to growth”, McKinsey Global Institute (January 2012). 5  IMF Fiscal Monitor (April 2012), “Balancing Fiscal Policy Risks”. 4  BIS central bankers’ speeches  finances. If one studies Figure 2, there appears to be a connection between good competitiveness and a lower public debt ratio. Figure 2 Relationship between competitiveness and public debt ratio 7  6  Sweden Denmark  5  Finland  Germany  Norway Spain  USA  Ireland  Italy  Portugal  4  Greece  3  2  1  0 20  40  60  80  100  120  140  160  180  Note. The public debt ratio is shown as a percentage of GDP on the horizontal axis. Sources: World Economic Forum 2011 and IMF Fiscal Monitor April 2012. The vertical axis measures the respective country’s competitiveness as defined by the World Economic Forum 2011, 6 while the horizontal axis measures the current level of public debt as a share of GDP. A higher value on the vertical axis means that a country has a better competitiveness. There may, of course, be many factors that affect the public debt ratio, but according to the figure it would appear that countries with good competitiveness also tend to have a lower public debt ratio.