CEPR published 13th CEPR/ICMB Geneva Report on the World Economy: ‘Public Debts: Nuts, Bolts and Worries’
16 September 2011
Recent discussions of debt sustainability and fiscal consolidation have been motivated by the crisis: markets are impatient and time is short. While not denying the need for immediate measures to address immediate problems, this report views the public debt situation from a longer-term perspective.
The report is devoted to fiscal policy reforms in the US, Europe and Japan, and offers a common political-economy framework to diagnose the need for fiscal consolidation and proposes institutional solutions rooted in that diagnosis. It includes a detailed analysis of how we got to the current situation, as well as a look at the very long run, when demographic factors already in place will sharpen an already degraded situation.
The political-economy framework presents the common pool interpretation of the deficit bias, the widespread tendency of demographic governments to spend more than they can collect in taxes. It arises because those who benefit from public spending are not the same as those who pay taxes. The former ask for more spending, the latter ask for less taxation, and governments need to please voters to be (re)elected. The policy response must address these fundamental characteristics of advanced democracies by adopting institutions and rules that lessen the common pool problem. Because electoral systems differ widely from one country to another, leading to different forms of common pool effects, no single institutional arrangement is best suited everywhere. This report links political systems to forms of institutional arrangements.
At this juncture, when the sovereign debt crisis is acute in the eurozone, menacing in the US and potentially festering in Japan, the report argues that fiscal stabilisation is easier the faster the economy is growing. It also advances suggestions on how to make debts sustainable through growth-enhancing measures.
Full report
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