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Symposium 2011

Solution for Redesigning Fiscal Consolidation and Debt Management

The Challenge

The global financial crisis has dramatically worsened the state of public finances in the majority of developed economies. Many are on unsustainable fiscal trajectories and there is broad agreement h ...

The global financial crisis has dramatically worsened the state of public finances in the majority of developed economies. Many are on unsustainable fiscal trajectories and there is broad agreement hat very substantial consolidation efforts are needed to re-establish stability. But there is much debate about the extent and timing of the consolidation process.

Radical fiscal consolidation should focus mainly on public spending cuts and also include steps to improve competitiveness.

Given the magnitude of the fiscal problems in many of the OECD countries, the fiscal consolidation must be substantial and for this to be credible, the government must use all means available.

Empirical evidence shows that fiscal consolidations relying on spending cuts have a higher rate of success than those relying on tax increases. Reducing the share of government spending in GDP is, therefore, crucial in drawing up a consolidation strategy that will work. Tax increases may be unavoidable in some countries, but priority should be given to taxes with the least negative effect on growth, such as taxes on property and consumption.

Governments in euro zone countries with shaky public finances must put special emphasis on combining their consolidation efforts with measures that will improve international competitiveness.

Cuts in government spending and tax increases usually curb domestic demand. Individual euro zone countries cannot expect this downward effect on activity to be offset by additional monetary expansion, as the European Central Bank—with its responsibility for the whole of the euro zone—cannot aim at stabilizing demand in individual EU countries.

Offsetting the negative demand effect of consolidation will primarily have to be done by improving the affected countries’ international competitiveness. Suitable policy measures to increase competitiveness include deregulation (including labor market reforms) and a strengthening of government efficiency at all levels.

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    Fiscal consolidation should take account of not just solvency but also liquidity considerations, such as the size of the yearly borrowing requirement.

    Fiscal consolidation should take account of not just solvency but also liquidity considerations, such as the size of the yearly borrowing requirement.

    Fiscal consolidation should take account of not just solvency but also liquidity considerations, such as the size of the yearly borrowing requirement.

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    Ideas from Students of the Humboldt Schule, Kiel

    Ideas from Students of the Humboldt Schule, Kiel

    Ideas from Students of the Humboldt Schule, Kiel

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