Chipping Away at Public Debt: Sources of Failure and Keys to Success in Fiscal Adjustment

Overview

Chipping Away at Public Debt

The global financial and economic crisis that began in the late2000s caused the public finances in the world's most advancedeconomies to experience their most profound worsening since WorldWar II. Government debts as a share of gross domestic product inthe G7 countries—Canada, France, Germany, Italy, Japan, theUnited Kingdom, and the United States—are now higher than inthe early 1950s. Spending pressures in the aging-related areas ofpensions and, ...

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Chipping Away at Public Debt: Sources of Failure and Keys to Success in Fiscal Adjustment

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Overview

Chipping Away at Public Debt

The global financial and economic crisis that began in the late2000s caused the public finances in the world's most advancedeconomies to experience their most profound worsening since WorldWar II. Government debts as a share of gross domestic product inthe G7 countries—Canada, France, Germany, Italy, Japan, theUnited Kingdom, and the United States—are now higher than inthe early 1950s. Spending pressures in the aging-related areas ofpensions and, especially, health care will add to the challenge inthe years ahead.

Written and researched by experts at the International MonetaryFund (IMF), Chipping Away at Public Debt looks at fiscaladjustment plans in advanced economies, comparing the planned orprojected reductions in debts and deficits to the actual outcomes.It also looks at whether spending exceeded, or revenues fell short,of expectations, and why, and whether planned debt reductionsproceeded faster or slower than projected. The concluding chaptersummarizes lessons learned and provides suggestions for attainingsuccessful fiscal adjustments.

Beginning with a Foreword by Carlo Cottarelli, Director of theIMF's Fiscal Affairs Department, Chipping Away at PublicDebt looks at:

  • Successful adjustment founded upon reforms in Canada (by C.Sancak, L. Q. Liu, and T. Nakata)
  • The quest for fiscal discipline in the United States (by J.Jonas)
  • Virtue and fortune in France's fiscal consolidation (by E.Martin, I. Tytell, and I. Yakadina)
  • Lessons from past experience in Germany (by C. Breuer, J.Gottschalk, and A. Ivanova)
  • Four chancellors facing challenges in the United Kingdom (by T.Ahnert, R. Hughes, and K. Takahashi)
  • Italy's medium-term fiscal planning under frequent governmentchanges (by F. Balassone, S. Momigliano, and P. Rizza)
  • Japan's fiscal adjustment plans and macroeconomic shocks (by K.Takahashi and K. Tokuoka)
  • A statistical analysis of performance in the European Union (byS.A. Abbas, F. Hasanov, P. Mauro, and J. Park)

With fiscal crises having recently begun to affect some advancedeconomies, there is now a greater realization that the need forfiscal adjustment in the years ahead is at its highest and will nodoubt remain a key issue for a long time to come. Required readingwhether you are an investor or economist, Chipping Away atPublic Debt changes the way we look at large fiscaladjustments, by shifting the focus of empirical analysis to largefiscal adjustment plans, as well as through comparison of plansversus outcomes.

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Editorial Reviews

From the Publisher
"This analytical cross-country study of fiscal adjustment will behighly relevant for several countries, especially those in the euroarea that, in the context of the new European governance, willfollow a path of public debt reduction in the years ahead."
—Carlo Azeglio Ciampi, Emeritus President of the ItalianRepublic (President, 1999–2006; Finance Minister,1996–1999)

"Unfortunately, out of necessity, the issues of debt and deficitdominate the national debate in too many countries. The experienceof others can often provide a guide to solutions—what to doand what not to do. In this context, this book will proveinvaluable."
—The Right Honorable Paul Martin, former Finance Minister(1993–2002) and Prime Minister (2003–2006) ofCanada

"Budget consolidation may well be the defining macroeconomicissue for the industrialized world over the next decade. The budgetdebate is as unbalanced as the budget. Ideology and rhetoricdominate in places where evidence and logic should dominate. Thisimportant book balances the debate by providing careful andanalytic evidence on all the important tradeoffs. It is a must-readfor everyone concerned about our fiscal future."
—Lawrence H. Summers, University Professor at HarvardUniversity; former Director, National Economic Council(2009–2011); Secretary of the U.S. Treasury(1999–2001)

"Reducing public debt will be the main policy issue for the nextdecade. This volume greatly helps us understand how to do it in away that achieves the intended objectives despite unexpected eventsthat will inevitably occur. We don't know as much as we shouldabout fiscal policy: this volume improves our understanding with acareful analysis of many international examples of fiscaladjustment. A great read."
—Alberto Alesina, Professor of Political Economy, HarvardUniversity

"How should countries around the world deal with theirburgeoning levels of national debt? This timely book's detailedcase studies illustrate that though failure is common, there isalso more than one path to success and a number of key principlesthat can serve as a guide to navigation."
—Alan J. Auerbach, Professor of Economics and Law, Directorof the Burch Center for Tax Policy and Public Finance, Universityof California, Berkeley

"There are few questions more important in the U.S. and Europetoday than how public debt will be brought under control.Chipping Away at Public Debt reviews a wealth of experiencewith large-scale fiscal adjustment plans in advanced economies,drawing on country studies as well as statistical analysis. Theauthors reach useful and sometimes unexpected conclusions. Inparticular, economic factors such as 'growth surprises' are perhapseven more important than political factors in determiningsuccess."
—Dani Rodrik, Professor of International Political Economy,John F. Kennedy School of Government, Harvard University

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Product Details

  • ISBN-13: 9781118043387
  • Publisher: Wiley
  • Publication date: 8/2/2011
  • Edition number: 1
  • Pages: 278
  • Product dimensions: 6.20 (w) x 9.10 (h) x 1.20 (d)

Meet the Author

PAOLO MAURO is a Division Chief in the IMF's Fiscal Affairs Department. He has published several articles in top economics journals and is coauthor of Emerging Markets and Financial Globalization: Sovereign Bond Spreads in 1870–1913 and Today. The IMF is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. Its Fiscal Affairs Department provides policy and technical advice on public finance issues to member countries.

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Table of Contents

Foreword ix

Acknowledgments xi

Introduction xiii

CHAPTER 1 Canada: A Success Story 1
Cemile Sancak, Lucy Qian Liu, and Taisuke Nakata

Introduction 1

Background 2

Plans versus Outcomes: Macroeconomic Factors 7

Nature and Composition of Adjustment 13

Structural Reforms 21

Extent to which Adjustments Were Sustained 23

Conclusion 25

Notes 27

CHAPTER 2 United States: The Quest for Fiscal Discipline31
Jiri Jonas

Introduction 31

First Attempt: Balanced Budget and Emergency Deficit Control Act1985 33

Second Attempt: Omnibus Budget Reconciliation Act of 1990 36

Third Attempt: Omnibus Budget Reconciliation Act of 1993 38

Actual versus Projected Fiscal Performance under Omnibus BudgetReconciliation Act of 1993 42

1990s Deficit Reduction: Good Policy or Good Luck? 44

Easy Won, Easy Lost? 50

Conclusion 52

Notes 54

CHAPTER 3 France: Virtue and Fortune 57
Edouard Martin, Irina Tytell, and Irina Yakadina

Introduction: Factors Underlying the Need for FiscalConsolidation 57

Early Attempts at Fiscal Adjustment 61

A First Attempt at Medium-Term Fiscal Consolidation,1994–97 64

A More Systematic Approach to Medium-Term Budgeting:Consolidation Experiences under the Stability and Growth Pact72

Conclusion 81

Notes 82

CHAPTER 4 Germany: Fiscal Adjustment Attempts With and WithoutReforms 85
Christian Breuer, Jan Gottschalk, and Anna Ivanova

Introduction 85

1975–79 Consolidation Attempt 88

1981–85 Consolidation Attempt 93

1991–95 Consolidation Attempt 99

2003–07 Consolidation Attempt 105

Lessons 110

Notes 112

CHAPTER 5 United Kingdom: Four Chancellors Facing Challenges115
Toni Ahnert, Richard Hughes, and Keiko Takahashi

Introduction 115

Selection of Consolidation Plans 116

Background, Content, and Performance of the Four AdjustmentPlans 117

Determinants of Success and Failure 125

Lessons from Success and Failure 138

Appendix 5A. United Kingdom: Fiscal Adjustment Plans andOutturns 140

Notes 150

CHAPTER 6 Italy: Medium-Term Fiscal Planning under FrequentGovernment Changes 153
Fabrizio Balassone, Sandro Momigliano, and Pietro Rizza

Introduction 153

A Brief History of Italy’s Fiscal Planning Framework155

Short-Term Origins of Medium-Term Failures 157

A Narrative of Design and Performance of Pre- and Post-EuropeanMonetary Unit Plans 162

Implementing Plans for the Year Ahead 165

Two Important Plans Analyzed in Detail 167

Conclusion 172

Notes 174

CHAPTER 7 Japan: Fiscal Adjustment Plans and MacroeconomicShocks 177
Keiko Takahashi and Kiichi Tokuoka

Introduction 177

The 1997 Fiscal Structural Reform Act 178

Medium-Term Fiscal Adjustment Plans: Fiscal Year 2002 and theFollowing 189

Conclusion 203

Appendix 7A: The Bohn Fiscal Sustainability Test 206

Appendix 7B: Timeline of Medium-Term Fiscal Adjustment Plans inJapan 209

Notes 209

CHAPTER 8 The Performance of Large Fiscal Adjustment Plans inthe European Union: A Cross-Country Statistical Analysis 213
S. Ali Abbas, Fuad Hasanov, Paolo Mauro, and JunhyungPark

Introduction 213

Data, Sample Selection, and Methodology 216

Descriptive Analysis 219

Regression Analysis 232

Conclusion 241

Appendix 8A: Data Issues and Cyclical Adjustment 243

Appendix 8B: Timeline for European Monetary Integration(1990–2009) 245

Notes 246

CHAPTER 9 Conclusion 249

Key Findings: What Failed and What Worked in Past Attempts atFiscal Adjustment 251

Implications for Planned Adjustments 255

Notes 258

References 259

About the Project Team 267

Index 271

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