The impact of alternative paths of fiscal consolidation on output and employment in the UK
Nitika Bagaria, Dawn Holland, Jonathan Portes, John Van Reenen 14 August 2012
While most economists agree that the UK and other countries need to cut back to ensure the sustainability of their public finances, the debate rages over when and by how much. This column argues that the timing matters – starting too early, before the economy has recovered, will have substantial economic costs.
In 2009-2010, the UK's budget deficit was about 11% of GDP (see here); there was no dispute among economists that a credible plan for fiscal consolidation was required. The discussion turned on the timing, given the fact that short-term interest rates are effectively at zero, output is substantially below capacity, and unemployment well above most estimates of the natural rate of unemployment.
Global crisis Macroeconomic policy Taxation
fiscal policy, UK, global crisis, Fiscal crisis, austerity, consolidation
How Euro economies are being choked by an accounting identity
Florence Pisani, Anton Brender, Emile Gagna 21 June 2012
Is austerity in the Eurozone doomed to fail? This column argues that Eurozone governments have to acknowledge that their response to the sovereign crises has been wrong. Bringing budgets back to balance as quickly as possible and at any cost for growth is a recipe for disaster.
By mid-2012 it is clear that the global recovery is at risk. By increasing uncertainty, while depressing demand in an important part of the world economy, the Eurozone crisis is dangerously slowing growth in the US and emerging economies. This is particularly worrying since the US economy could easily be pushed close to the recession zone. This would be worrisome since if the US engine were to stall, it will be very difficult to restart – given the constraints weighing on both fiscal and monetary policy.
EU policies Macroeconomic policy
Fiscal crisis, Eurozone crisis
The Eurozone crisis: Fiscal fragility, external imbalances, or both?
Pietro Alessandrini, Andrew Hughes Hallett, Andrea F Presbitero, Michele Fratianni 16 May 2012
Unsustainable debt along Europe’s periphery is bringing the euro to breaking point. But this column argues that this is not simply the result of fiscal ill-discipline. After 2010, the Eurozone crisis went from a fiscal crisis to a balance-of-payments crisis – with different prescriptions for policy.
The speculative attack against Eurozone sovereign debt, reflected in the extraordinary rise in the yields of government bonds for Greece, Ireland, Italy, Portugal, and Spain (known affectionately as the GIIPS) since the start of 2010, has sparked a heated policy debate on how best to stabilise the Eurozone (see the Vox debate moderated by Corsetti 2012). Two main views have emerged:
Fiscal crisis, Eurozone crisis, balance of payments
US debt issuance since 1951 and the fallacy of issuing floating rate notes
Peter Stella, Manmohan Singh 14 May 2012
Much of the debate over public finances in the US relates to the amount of debt, this column explores the type of debt. It criticises the recent suggestion that the US Treasury should start issuing floating rate notes.
Most of today’s debate turns on the amount of US debt issuance, but the nature of the debt is also under discussion. In the current environment of macroeconomic uncertainty, the demand for safe assets has bloomed and the definition of “safe” is evolving. Part of this is the debate on whether floating rate notes should be issued by the US Treasury. In a recent report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee (31 January 2012), reference was made to floating rate notes:
US, public debt, Fiscal crisis, floating rate notes
Direct democracy as a safeguard to limit public spending
Patricia Funk, Christina Gathmann 10 February 2012
As debt crises hit on both sides of the Atlantic, a safe haven for many investors has been Switzerland. This column looks at Swiss public spending over the last century and argues that one reason for its low debt may be its greater use of direct democracy, where people vote on individual policies, as opposed to representative democracy, where people elect others to make decisions on their behalf.
The current debt crisis in Europe and North America raises the question of how to impose spending discipline on governments and politicians. A country with historically low government spending is Switzerland, which many argue is related to the high use of direct democracy. Direct democracy is also prevalent in other countries such as the United States, where more than two thirds of the population lives in a state or city with a popular initiative.
Europe's nations and regions Politics and economics
democracy, Switzerland, Fiscal crisis, Eurozone crisis
Mispricing of sovereign risk and multiple equilibria in the Eurozone
Paul De Grauwe, Yuemei Ji 23 January 2012
Economists now agree that markets were wrong in placing the same risk premium on Greek bonds as on German bonds. But this column adds that today the same markets are also wrong in overestimating the risk that the periphery countries will default. Policymakers looking to calm such skittish markets should take note.
It is widely acknowledged that Eurozone financial markets were systematically wrong from 2001 to 2008 when they charged the same risk premium on Greek and German government bonds despite huge differences in their debt-to-GDP ratios.
Europe's nations and regions International finance
government bonds, Fiscal crisis, Eurozone crisis
Lessons from a century of large public debt reductions and build-ups
S. M. Ali Abbas, Nazim Belhocine, Asmaa El-Ganainy, Mark Horton 18 December 2011
As policymakers continue to grapple with high debts and the troubles that come with them, this column looks at the lessons from data on public debt in 178 countries stretching back as far as 1880. It argues that when faced with an unsustainable debt burden, slow but steady adjustment is the way to go.
Empirical work on debt cycles and debt sustainability has been constrained by lack of public debt data on a large number of countries over a long time period. Existing studies are based on datasets that either cover short time periods (such as Jaimovich and Panizza 2010) or omit a large number of countries (such as Reinhart and Rogoff 2010).
Global governance Macroeconomic policy
public debt, Fiscal crisis, Eurozone crisis
Can austerity be self-defeating?
Daniel Gros 29 November 2011
With European governments cutting back on spending, many are asking whether this could make matters worse. In the UK for instance, recent OECD estimates suggest that ‘austerity’ will lead to another recession, which in turn may lead to a higher debt-to-GDP ratio than before. As the debate heats up, this column provides some cool economic logic.
Could ‘austerity’ be self-defeating? Could a reduction in government expenditure lead to such a strong fall in activity that fiscal performance indicators actually get worse?
Europe's nations and regions Macroeconomic policy
UK, Fiscal crisis, Eurozone crisis, austerity
Chipping away at public debt – Sources of failure and keys to success in fiscal adjustment
Anna Ivanova, Paolo Mauro, Edouard Martin 09 November 2011
Fiscal consolidation is just one of the many ugly phases that we will have to get used to in the coming years. Yet how can governments reduce their debts without making things even uglier? This column argues that although today’s debts are the highest since World War II, there is much to be learned from previous attempts.
The global financial crisis has caused government debt to soar in the advanced economies. Public concern is rising and debates rage on how to fix the problem.
- In advanced economies, the average debt-to-GDP ratio is approaching 100% – higher than at any time since World War II, and set to increase further.
- The required fiscal adjustment is historically unprecedented.
It will take many years of chipping away at public debt to bring it back to more prudent levels.
International finance Politics and economics
public debt, Fiscal crisis
Public debt in the Eurozone, Japan, and the US
Charles Wyplosz 16 September 2011
Europe’s debt crisis is unfolding while Japanese and US debt problems are on hold. The problem of public debt in advanced economies will be with us for decades. This column introduces a new Geneva Report on the World Economy that addresses the nuts, bolts, and worries surrounding the issue.
There is little doubt that public debts have become outsized in many developed countries. Worse, they are expected to keep growing over the next decades as populations age. The financial markets have now set their eyes on this situation, making it difficult or expensive to borrow for a number of Eurozone countries, and the list could grow and expand beyond the Eurozone.
Global economy Macroeconomic policy
US, EU, Japan, debt, Fiscal crisis, Eurozone crisis