Shorting Fiscal Consolidation

First there is the issue of how fast to reduce government deficits and the accumulation of public debt.

With government deficits the norm, that appears unlikely.

That will prolong excessive government spending, and deficit targets will not be met on a sustained basis.

Sometimes, even often, economies prosper nicely after the government s deficit is sharply reduced.

So raising inflation is no cure for the government s current debt or future deficits.

A substantial part of the increased deficit will be due to a wide range of new government spending.

Even if this widens the deficit in the short run, it will reduce the national debt in the long run.

Budget deficits automatically increase government debt, requiring higher future taxes to pay the interest on that debt.

Once again, we would see what might appear, from looking at the government deficit, to be an austerity to prosperity scenario.

Today, the best way to use deficits and government debt is to focus on distributional issues, particularly the unemployed, both actual and potential.

They also believe that the government deficit drives up inflation and interest rates, thereby crowding out other spending by consumers and firms.

Government deficits rarely exceeded 3 of GDP in past decades, and there were surpluses in recent years.

Since that exceeds the size of the government deficit, it implies that private markets do not need to buy any of the newly issued government debt.

But this direct link between higher household saving and a lower dollar will only be forged if higher household saving is not outweighed by a rise in government dis saving, i.e., by a larger government deficit.

maintain our efforts to expand the scope of economic surveillance to include government deficits and public as well as private sector debt, if necessary by imposing political penalties

To head off this possibility, the EU created the Stability and Growth Pact government deficits had to be less than 3 of GDP.

When weak aggregate demand causes the economy to operate far below its potential, cuts in government spending enlarge the jobs deficit.

Yet another vacuous budget deal, in conjunction with weaker than expected growth for the US economy for years to come, spells a protracted period of outsize government deficits.

When the EFSF was created, it was assumed that the only problem was to ensure financing for the government deficits of the four prospective problem countries (Portugal, Ireland, Greece, and Spain).

Cuts to child allowances and unemployment pay have caused a consistent rise in the poverty rate, and government income transfers designed to combat it make an even smaller dent in poverty now than they did in the 1980s.

Labour s model of the economy implies maintaining the deficit for as long as needed, and even increasing government spending if the recovery appears to be flagging. But Labour is too afraid of the markets to say so openly.

In Europe, especially Germany, and in some quarters in the US, as government deficits and debt grow, so, too, do calls for increased austerity.

America s multilateral trade deficit will not be significantly narrowed until America saves significantly more while the Great Recession induced higher household savings (which were near zero), this has been more than offset by the increased government deficits.

Indeed, despite the large government deficit and the enormous government debt now close to 200 of GDP the interest rate on 10 year Japanese government bonds is just 1 , the lowest such rate in the world.

In the short to medium run, fiscal consolidation whether in the form of cutting government spending or increasing revenues results in lower output and employment, which means lower tax collection, higher deficits, and escalating debt relative to GDP.

And deficits can lead to inflation if central banks monetize the government debt, a serious concern in financial markets, as China has warned America.

Aside from wringing their hands, what should governments be doing? One extreme is the simplistic Keynesian remedy that assumes that government deficits don t matter when the economy is in deep recession indeed, the bigger the better.

The German government also successfully passed a constitutional law requiring the government deficit to be capped at 0.35 of GDP in 2016 and eliminated by 2020.

While fiscal austerity may be necessary in countries with large deficits and debt, raising taxes and cutting government spending may make the recession and deflation worse.

In addition, to ensure price stability, it will be necessary to further reduce the need for domestic financing of Government deficits through reduced recurrent spending and sound fiscal and monetary policies.

By contrast, the government sector has been moving in the opposite direction, as state and local governments retrench and federal purchases top out after post crisis deficit explosions.

The Germans have been widely castigated for pointing out that Europe has no clear mechanism for sorting out sovereign (government) defaults, and that surely it needs one.

Measured over a five year period (2007 2012), the US has thus not done any better than the eurozone, although it has relied on a much larger dose of fiscal expansion.

Liberal cycles are characterized by government intervention and conservative cycles by government retreat.

The policies adopted or discussed by American policymakers and scholars nowadays quantitative easing, fiscal stimulus packages, government deficit reduction seek to cure only the symptoms of a deeper malaise.

Reducing the budget deficit by 10 of GDP would mean an enormous cut in government spending or a dramatic rise in tax revenue or, more likely, both.

Despite cuts in government spending and increases in taxes, the IMF still projects the cyclically adjusted fiscal deficit to exceed 3.2 of GDP in 2013 and 2.3 of GDP in 2015.

Extrapolating over the coming decade, the numbers would approach 5 trillion, an amount vastly larger than what both President Barack Obama s administration and his Republican opponents seem willing to cut from further government deficits.

This would be the opportunity to strengthen cooperation between the governmental and non governmental sector.

Particularly for those countries that have adopted the euro, government spending on the arts will be constrained for some time by the requirement that fiscal deficits be kept to 3 of GDP.

The reform proposals that are currently being debated are adventurous to say the least, because they all seem to center around the question of which government expenses should be exempt from the calculation of the deficit.

Consider the issue of government procurement.

In defense of public

At the intergovernmental level