Fiscal Consolidation: Striking the Right Balance


By David Lipton

(Version in Español, in عربي)

The debate on austerity vs. growth has gained in intensity, as countries in Europe and elsewhere struggle with low growth, high debt, and rising unemployment. In essence, policymakers are being asked to tackle a continuation of the worst crisis since the Great Depression.

This would be no easy task under any circumstances. But it is made considerably harder by the fact that a number of countries need to engage in fiscal consolidation simultaneously. Complicating the picture further is the fact that monetary policy in most advanced economies is approaching the limits of what it technically can do to stimulate activity, while global growth remains weak.

There is no getting around the need to reduce debt levels. High debt leaves countries exposed to interest rate shocks, limits their capacity to respond to future shocks, and reduces long-term growth potential.

At the same time, we all know that fiscal consolidation―reducing deficits by cutting spending or raising revenues―can and usually does stifle growth. With more than 200 million people out of work worldwide, and with growth in advanced countries forecast at a mere 1½ percent for 2012, getting the pace of consolidation right is therefore of paramount importance. So how do policymakers strike the right balance?

Continue reading

Mediocre Growth, High Risks, and The Long Road Ahead


By Olivier Blanchard

(Versions in Español, عربي)

For the past six months, the world economy has been on what is best described as a roller coaster.

Last autumn, a simmering European crisis became acute, threatening another Lehman-size event, and the end of the recovery.  Strong policy measures were taken, new governments came to power in Italy and Spain, the European Union adopted a tough fiscal pact, and the European central bank injected badly needed liquidity.   Things have quieted down since, but an uneasy calm remains.  At any moment, it seems, things could get bad again.

This shapes our forecasts.  Our baseline forecast, released by the IMF on April 17,  is for low growth in advanced countries, especially in Europe.  But downside risks are very much present.

Brakes hampering growth

This baseline is constructed on the assumption that another European flare-up will be avoided, but that uncertainty will linger on.   It recognizes that, even in this case, there are still strong brakes to growth in advanced countries:  Fiscal consolidation is needed and is proceeding, but is weighing on growth.  Bank deleveraging is also needed, but is leading, especially in Europe, to tight credit.  In many countries, in particular in the United States, some households are burdened with high debt, leading to lower consumption. Foreclosures are weighing on housing prices, and on housing investment.

Continue reading

Follow

Get every new post delivered to your Inbox.

Join 671 other followers

%d bloggers like this: