Received Wisdom and Beyond: Lessons from Fiscal Consolidation in the EU

Larch, Martin; Turrini, Alessandro

doi:10.1177/0027950111420917

Cited by 23 publications

(62 citation statements)

References 22 publications

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“…As a general rule, fiscal consolidation is undertaken only when public finances are weak, as measured by rising deficits and debt levels (Molnar ). In fact, some studies suggest that the gravity of the initial fiscal conditions influences nations to undertake deeper and more prolonged consolidations, which have a greater chance of stabilizing debt in the future (Larch and Turrini ; Perotti ).…”

Section: Achieving the Politically Improbablementioning

confidence: 99%

“…This included the shadow cast by the original economic and fiscal crisis of the mid‐1980s and the reliance of the Australian economy on foreign sources of capital to finance private investment. Today, as national leaders engage in yet a new round of consolidation to bring modest deficits into surpluses, one observer concluded that budget surpluses have come to serve as a symbolic metaphor for the competence of the government—the single most important “acid test” of a government's economic credentials (Hawke and Wanna ).…”

Section: Achieving the Politically Improbablementioning

confidence: 99%

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The Politics of Fiscal Austerity: Implications for the United States

Posner

Sommerfeld

2012

Public Budgeting & Finance

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As austerity becomes the new normal for advanced nations, questions are raised about whether nations can make the hard choices necessary to bring about a sustainable fiscal future. The political defeat experienced by so many European governments undertaking fiscal consolidations points to the vulnerabilities that leaders will face. This article shows that how some Organization of Economic Cooperation and Development (OECD) nations have survived the daunting politics of fiscal consolidation by timing actions for periods of economic recovery and political honeymoons following elections and by pursuing deficit reduction strategies that emphasize broad sweeping changes yielding high potential for dramatic economic gains over the longer term. Unlike many European nations today, the seemingly endless appetite for US treasuries by worldwide markets give the United States the luxury of choosing to begin deficit reduction only when the economy strengthens. However, the absence of market pressure also reduces the sense of urgency, consigning national leaders to create internal crises such as the 2012 "fiscal cliff" to force their own hand. While the polarized politics characterizing our party system does not bode well for concerted fiscal action, divided government carries the potential for spreading political risks and promoting more sustainable fiscal outcomes, as it has in our recent history and in other nations as well.

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Section: Achieving the Politically Improbablementioning

confidence: 99%

Section: Achieving the Politically Improbablementioning

confidence: 99%

The Politics of Fiscal Austerity: Implications for the United States

Posner

Sommerfeld

2012

Public Budgeting & Finance

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“…Cohesive single parties controlling government are more likely to develop and successfully achieve fiscal consolidation packages than fragmented coalitions. Coalition partners often have difficulty agreeing on packages compared to more unified parties (Larch and Turrini 2008). Since proportional representation systems tend to foster politically fragmented regimes, some have generalized that governments with majoritiarian electoral systems maintain tighter fiscal discipline than other systems (Persson and Tabellini 2003).…”

Section: Understanding the Politics Of Fiscal Austeritymentioning

confidence: 99%

Democracies and Deficits: Prospects for Fiscal Responsibility in Democratic Nations

Posner

Blöndal

2011

Governance

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The financial crisis had significant implications for the fiscal positions of OECD. As nations seek to cope with the economic contraction, budget deficits and debt have risen to near record postwar levels. As the crisis in Europe and other advanced economies has deepened, fiscal consolidation will have to be coupled, and even preceded, by actions to jump-start crippled economies. Nonetheless, when fiscal consolidation becomes necessary, nations that procrastinate by waiting for a crisis to provide cover for the politically hard choices will pay a steep price indeed both economically and politically. Many in the academic and policy community have raised questions about whether advanced democracies have the political wherewithal to respond to gathering fiscal pressures through early and timely action. Recent fiscal actions in advanced nations suggest that democracies are not doomed to wait for market shocks and crises. Rather, leaders have shown that fiscal sacrifice can be achieved in ways that promote electability. In this article, we discuss the impetus for democratic fiscal actions and the strategies used to gain public support.The financial crisis had significant implications for the fiscal positions of Organisation for Economic Co-operation and Development (OECD) nations. As nations seek to cope with the economic contraction, budget deficits and debt have risen to near record postwar levels. As nations cope with the resulting fiscal imbalances, they will also be dealing with longer term fiscal pressures stemming from the aging of populations and rising health-care costs. In contrast to previous recessions, the return of strong growth will not end the fiscal gaps facing these nations but will serve as the prelude for even more difficult and wrenching choices. The depth of the economic contraction and financial crisis in many European nations highlights the difficult balancing act that nations and the European community itself have had to make between short-term economic stimulus and inevitable fiscal consolidation initiatives. Once the recovery begins in earnest, the magnitude of fiscal adjustments faced by nations will only grow the longer they delay implementing consolidation. Nations that procrastinate by waiting for a crisis to provide cover for the politically hard choices will pay a steep price indeed both economically

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“…Evidence from the 1970s and 1980s suggested that fiscal consolidation on the scale we discuss was better done by cutting spending. Larch and Turrini (2008) look at more recent efforts, and suggest that this result reflected picking the low hanging fruit, and that a more balanced approach based on a strong fiscal framework would now be more appropriate.Given the increased debt stock, there is continual worry about the possibility that a risk premium will arise on UK government debt, and on UK debt in general, and that these would have a deleterious effect on prospects for the economy. If such a premium arises, then government interest payments and hence tax rates (or borrowing) will have to be higher.…”

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confidence: 99%

mentioning

confidence: 99%

Medium-Term Prospects for the Public Finances

Barrell¹,

Kirby²

2010

Natl. Inst. econ. rev.

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The financial crisis and the recession it induced have wrought havoc with our understanding and decisionmaking on the medium-term fiscal position. The crisis will leave us with a higher debt stock and a lower level of sustainable output, and both of these will have implications for the optimal paths for spending and for taxes. If sustainable output has changed then spending plans need to be revised, even if there is no excessive accumulation of debt. If debt has been accumulated in excess of that seen as wise before the crisis, then a plan must be in place to raise taxes and reduce spending in order to return to (or towards) a desired level of debt, even if sustainable output has not been affected. In addition to adjustments in response to changes in trend output and in the debt stock, there may also be a need for an adjustment in response to any structural deficit that existed before the crisis broke.We base our analysis on the forecast discussed in Kirby et al. (2010) in this Review. We divide our discussion into spending, taxes and debt, as decisions need to be made for each, but there are three separable problems that these decisions must address. If all we have seen is a transitory shock to sustainable output then the case for real spending cuts and a smaller government sector before interest payments is weak to non-existent. If all we have seen is a shock to sustainable output then the case for reducing real spending as a share of GDP and hence reducing the share of the government in output is also weak, but a case can be made for small reductions in real spending. If all we have seen is a large rise in the debt stock then the interest on that debt needs servicing, and some debt repaying, and hence the optimal decision for the Government would require both higher taxes and lower real spending in about equal proportions, if decisions had been taken such that the marginal benefits from higher spending were just equal to the marginal costs of higher taxes. This is in part a political choice, and a new administration might want to cut spending independently of the impacts of the recent crisis. If we had a structural deficit before the crisis and spending plans were optimal this would suggest that taxes were too low. Overall we would argue that the case for higher taxes is much stronger in the current situation than the case for lower real spending as a per cent of GDP. Evidence from the 1970s and 1980s suggested that fiscal consolidation on the scale we discuss was better done by cutting spending. Larch and Turrini (2008) look at more recent efforts, and suggest that this result reflected picking the low hanging fruit, and that a more balanced approach based on a strong fiscal framework would now be more appropriate.Given the increased debt stock, there is continual worry about the possibility that a risk premium will arise on UK government debt, and on UK debt in general, and that these would have a deleterious effect on prospects for the economy. If such a premium arises, then government interest payments a...

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Received Wisdom and Beyond: Lessons from Fiscal Consolidation in the EU

Cited by 23 publications

References 22 publications

The Politics of Fiscal Austerity: Implications for the United States

The Politics of Fiscal Austerity: Implications for the United States

Democracies and Deficits: Prospects for Fiscal Responsibility in Democratic Nations

Medium-Term Prospects for the Public Finances

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