Chris Van Es

Fiscal Fibs and Follies

Across the globe, the debate over fiscal consolidation has the distinct sound of two sides talking past one another. Whereas severely distressed southern European states may well benefit from cutting their budget deficits, those arguing for fiscal consolidation in the major G-20 economies are playing a dangerous game.

BERKELEY – Across the globe, the debate over fiscal consolidation has the distinct sound of two sides talking past one another.

On one side are those who insist that governments must move now, at all cost, to rein in budget deficits. Putting public finances on a sustainable footing, they argue, is essential to reassure financial markets. If concerted efforts are taken to balance budgets, confidence will be bolstered. And if confidence is bolstered, consumption and investment will rise.

In this view, cutting deficits will be expansionary. As evidence that this is not merely a hypothetical possibility, advocates of fiscal consolidation point to cases like Denmark in the early 1980’s, Ireland in the late 1980’s, and Finland in the 1990’s.

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