A poorly managed country is the one that runs deficits year after year. By that account, the US and Pakistan are not much different. Both have run deficits for years. So, why is the US the land of opportunity and Pakistan is labelled as a financial basket case?

The US federal government is facing default. The US Treasury’s borrowing authority needs to be extended to avoid default and to re-open the federal government, which save for the essential few services, has effectively been under a shutdown. The Democrats and Republicans are fighting over fiscal plans. The Republicans control the US Congress and are unwilling to extend the debt ceiling until they are able to limit the extent of President Obama’s healthcare plan. The result is a fiscal gridlock where credit rating agencies are threatening to downgrade the US credit rating.

It is an inescapable truth that Americans (businesses, households, and governments) are spending more than they earn. The indebtedness of American households has been on the rise as well. The American household debt stands at 95 per cent of the GDP. Their federal government is no different. The Federal Reserve estimated in 2009 that the total debt owed by US households, businesses, and governments equalled $50.7 trillion, which was roughly 3.5 times the annual US GDP. Despite the dismal state of fiscal affairs, the US is deemed a superpower. With a similar fiscal outlook, Pakistan though is considered to be in the dumps. What gives?

The recent shutdown of the federal government exposes the poor state of affairs in the US. Despite the repeated assertions by the American presidents, both Democrats and Republicans, that the State of the Union is strong, all has not been well for decades. The US budget deficit has been looming over the years and has reached alarming proportions. In fact, the US federal government has run annual budget deficits in 36 out of the past 40 years.

Last year, the US budget deficit stood at $1.1 trillion. The federal government raised $2.45 trillion in taxes, but spent $3.54 trillion. According to the Congressional Budget Office (CBO), public debt in 2012 totaled $11.3 trillion, whereas the total national debt stood at $16 trillion. In the business as usual scenario forecast, the national debt will expand to a whopping $25 trillion by 2022.

Source: http://en.wikipedia.org/wiki/File:CBO_-_Revenues_and_Outlays_as_percent_GDP.svg
Source: http://en.wikipedia.org/wiki/File:CBO_-_Revenues_and_Outlays_as_percent_GDP.svg

Debt levels in the US have been on the rise for over six decades. The total US debt in 1946 was 150 per cent of the GDP. Most of the debt then was held by the federal government. Today, the total US debt is 350 per cent of the GDP. The debt held by the financial sector stood at 109.5 per cent of the GDP in 2009. Again, in 1946 the financial sector debt amounted to only 1.35 per cent of the GDP.

The US credit binging has not gone unnoticed by the international regulating authorities. The IMF got spooked by the US insatiable appetite for credit. It accused the US of lacking a “credible strategy” to reign in its mounting public debt. According to the Financial Times, the IMF was of the view that,

The US was the only advanced economy to be increasing its underlying budget deficit in 2011, at a time when its economy was growing fast enough to reduce borrowing.

Pakistan’s fiscal outlook is no different. Year after year the amounts raised from taxes fell short of the total cash outlay planned for in the budgets. The result, the government ran budget deficits each year. The IMF and other lenders have been mindful of the rising debt levels in Pakistan and have therefore warned of dire consequences.

Why is it then, that the two countries have substantially different reputations?

The answer perhaps lies in the willingness of others to continue offering debt to cover one’s shortfalls. Globally, lenders remain willing to lend even more funds to the United States. China alone holds $1.2 trillion of the US debt, which is more than the US debt held by the US households ($959 billion).

So let me try to answer the riddle once again. A poorly managed country is not the one that runs fiscal deficits year after year. It's the one that others refuse to lend to. Otherwise, Pakistan and the US are not all that different.

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