Redesigning Fiscal Consolidation and Debt Management

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 that very substantial consolidation efforts are needed to re-establish stability. But there is much debate about the extent and timing of the consolidation process.

Large short-term fiscal consolidation measures are likely to restrain severely the chances of recovery from the high levels of unemployment in many countries. But postponing consolidation may not be a viable option in cases where the fiscal position has worsened to such an extent that a country is no longer able to borrow on the international capital markets at sustainable interest rates.

What is the most desirable way to avoid exploding national debt in times of slow growth and recession-prone economies? How can a country establish an optimal path of consolidation? How is that path affected by the country’s standing in the financial markets? Should the consolidation path be combined with a path for the growth of public expenditure?

To what extent should there be constraints on national governments’ ability to determine the path of consolidation? How should these constraints be implemented? How can conflicts be avoided between internal constraints (for example, through national debt breaks or national stability councils) and external constraints (for example, through conditionality imposed by the International Monetary Fund or obligations under the European Union’s Stability and Growth Pact)?

Is a full-bore restructuring inevitable in a number of fiscally challenged European countries? What are the risks that the United States will be forced by the markets to follow the “austerity” approach of the UK and other countries?