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G20 Leaders Pledge to Cut Government Deficits

Leaders from the world's 20 most important economies set targets to slash government deficits, haggled over tougher financial regulations and compromised on a proposal to tax banks. The G20 meeting wrapped up Sunday in Toronto.

G20 leaders say the global economic recovery is fragile and faces serious challenges, including growing government deficits.

The Greek crisis showed how large deficits can make lenders worry that they will not be repaid, and keep them from making the new loans, stalling the economy.

Canadian Prime Minister Stephen Harper urged his colleagues in advanced nations to cut their deficits in half in three years, but also urged them to make cuts with caution.

"Here is the tight rope that we must walk," he said. "To sustain recovery it is imperative that we follow through on existing stimulus plans those to which we committed ourselves last year but 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."

Mr. Harper's point is that cutting deficits too little or too slowly hurts investor confidence. But if nations make the cuts too deeply or too quickly, they risk losing the potential economic stimulus generated by government spending, something that critics say could push the global economy back into recession.

The G20's final communiqué, hammered out by leaders behind closed doors, also offers a compromise on a proposal for a new tax on banks.

Related Video report by William Ide

At the height of the global financial crisis, many financial firms were bailed out by governments using taxpayer money.

Bank tax advocates say the financial industry, not taxpayers, should put up the money to help cover the cost of a future crisis. Critics of the tax idea say it would disadvantage banks in countries that impose it and hurt their economies. And the idea is strongly opposed by banks.

But analyst David Shorr of the Stanley Foundation says the proposal has broad political appeal.

"At the political level, a lot of anger pent up at what's happened," he said. "Look at how the publics have had to live with the consequences of all of the risky business that the financial industry has done."

So the G20 leaders compromised, endorsing the principal that the financial industry should pay for any future crisis, but leaving each nation free to work out ways to raise the money.

They also discussed the need for better ways to regulate financial firms, and directed groups of experts to refine proposals for the November's G20 gathering in Seoul, South Korea.

John Kirton of the University of Toronto, an expert on the G20, says the most important proposal is to require banks to lend out a smaller proportion of their money and keep more in reserve.

"So if a new crisis pops up, they will have more of their own money on hand as a buffer for bad times," he said.

There are also proposals to regulate derivatives, the complex financial transactions that are blamed for deepening the global financial crisis.

During the international meeting, some advocates for the poor complained that the G20 and the group of eight leading industrialized nations, or G8, did not do more to help the world's most vulnerable people.

Leaders of the G8 pledged to donate $5 billion during the next five years to help reduce the number of women who die in childbirth around the world.

But the Executive Director of the charity Oxfam Canada, Robert Fox, called it a small sum compared with the $17 trillion, he says, major nations used to rescue banks at the height of the financial crisis.