Balancing Fiscal Support with Fiscal Solvency


By Carlo Cottarelli

As I noted in my last post, government deficits in many countries—particularly in advanced countries—have jumped dramatically in the wake of the global crisis, and government debt has reached levels that could jeopardize longer term macroeconomic stability and growth. These countries will need to tighten fiscal policy significantly sometime down the road, especially where demographic trends are pushing up health and pension spending.

But fiscal deficits cannot be lowered in the immediate future. For the time being, fiscal (and monetary) policies must continue to support economic activity. The economic recovery is uneven and could be threatened by any premature withdrawal of policy support. Private demand is still unable to stand on its own two feet.

 This gives rise to a policy conundrum. How can we reconcile the competing requirements of  short-term support for the economy and longer term fiscal solvency?

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