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Budget consolidation: Should reversing new government borrowing be started only after the crisis has been overcome?

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Listed:
  • Hans Fehr
  • Wolfgang Scherf
  • Michael Eilfort
  • Guido Raddatz

Abstract

The current financial crisis and the state stimulus programmes to ameliorate the damage have driven national debts to record levels. When should budget consolidation begin and what measures should be used? In the opinion of Hans Fehr, University of Würzburg, the consolidation of public budgets will not succeed via tax cuts. If the goal of budget consolidation is to be reached by 2016, cuts in expenditure are inevitable. The guarantees made regarding the stability of pension payments could be rescinded, for example, or subsidies could be reduced. Wolfgang Scherf, University of Gießen, sees the additional deficits that have become temporarily necessary as the prerequisite for a subsequent economic and fiscal recovery. For this reason "temporarily putting on the brakes on new-debt" endangers both. He recommends a cyclically flexible design of the "much too rigidly conceived" new debt boundaries. Michael Eilfort and Guido Raddatz, Stiftung Marktwirtschaft, argue that it is dangerous to indefinitely postpone consolidation efforts and to increase the ratio of national debt to GDP more strongly than absolutely necessary.

Suggested Citation

  • Hans Fehr & Wolfgang Scherf & Michael Eilfort & Guido Raddatz, 2009. "Budget consolidation: Should reversing new government borrowing be started only after the crisis has been overcome?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 62(21), pages 03-12, November.
    • Handle: RePEc:ces:ifosdt:v:62:y:2009:i:21:p:03-12
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    References listed on IDEAS

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    3. Briotti, Maria Gabriella, 2005. "Economic reactions to public finance consolidation: a survey of the literature," Occasional Paper Series 38, European Central Bank.
    4. Moog, Stefan & Raffelhüschen, Bernd, 2009. "Ehrbarer Staat? Die Generationenbilanz - Update 2009: Wirtschaftskrise trifft Tragfähigkeit," FZG Discussion Papers 38, University of Freiburg, Research Center for Generational Contracts (FZG).
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    More about this item

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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