Advanced economies are facing the difficult challenge of implementing fiscal adjustment strategies without undermining a still fragile economic recovery. Fiscal adjustment is key to high private investment and long-term growth. It may also be key, at least in some countries, to avoiding disorderly financial market conditions, which would have a more immediate impact on growth, through effects on confidence and lending. But too much adjustment could also hamper growth, and this is not a trivial risk. How should fiscal strategies be designed to make them consistent with both short-term and long-term growth requirements?
We offer ten commandments to make this possible. Put simply, what advanced countries need is clarity of intent, an appropriate calibration of fiscal targets, and adequate structural reforms. With a little help from monetary policy, and from their (emerging market) friends.
Filed under: Advanced Economies, Asia, Economic research, Emerging Markets, Financial Crisis, Fiscal Stimulus, growth, International Monetary Fund | Tagged: advanced economies, budgets, China, Europe, fiscal policy, G-20, G-7, Japan, taxation, U.S. Congress, United States, Value-Added Tax | 18 Comments »