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2024 SEI ® Data as of 12/31/2023 unless otherwise indicated. 11 ending November 2023. Outright deflation is an unusual occurrence in any major economy (Japan is another exception). It is a worrisome development for central banks because their policy tools become less effective. That is why policy-makers prefer a 2% target inflation rate rather than true price stability. Given China's deflationary bias, a more aggressive fiscal policy is probably necessary. But the regime of President Xi Jinping has been loath to engage in a big fiscal reflation, preferring targeted measures instead. Perhaps 2024 will be the year China takes a bigger policy gamble, but there is little sign of that yet. Fiscal follies Last year at this time, SEI warned that government finances would deteriorate following improvement in 2022. This was an accurate call. Although the deficit financing might diminish a bit in 2024, now that COVID emergency expenditures have come to an end, that doesn't mean that the fiscal positions of the major economies will improve dramatically. In the U.S., spending is mostly on autopilot, given Congressional deadlock and the fact that we are entering a presidential election year. Some of the biggest legislative achievements of the administration of President Joe Biden (the Inflation Reduction Act, the Chips Act, and the infrastructure bill) have long tails. In Europe, countries are finding that, in Kermit the Frog's immortal words, "it's not easy being green." Although payments to households to offset high electricity costs have ebbed, incentives to speed the transition to lower carbon emissions will keep overall spending levels high. All countries will also need to deal with higher expenditures on old-age benefits, further hikes in military expenditures, and much higher interest expense. Central government debt as a percentage of GDP has risen across the major economies versus four years ago just before COVID lockdowns, as illustrated in Exhibit 15. The U.S. and Canada have recorded the largest expansion in government debt relative to GDP, rising almost 17 percentage points since the end of 2019. Italy isn't far behind with its debt-to-GDP ratio advancing 14.5 percentage points over this span. The U.K., France and Japan each have recorded 11-percentage point rises, with the latter country's ratio now reaching 213%. Unlike other central banks, the BOJ continues buy its government securities hand over fist in order to keep interest rates at absurdly low levels relative to those of any other country. Exhibit 15: Debtors' prison Source: FactSet, SEI. 0 50 100 150 200 250 Germany Canada U.K. France U.S. Italy Japan Percent Government debt as percent of GDP Year-end 2019 Latest reading

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