## The Times They are a-Changin’: will (fiscal) history repeat itself?

_IMF Blog, July 24, 2013_

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## Bibliographic details
- Authors: Carlo Cottarelli
- Published: July 24, 2013

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### Convergence of incomes and social change
- Simple empirical evidence suggests convergence of real per capita GDP in emerging markets to the level observed in Western Europe and the United States in the early sixties.
- Conjecture: once per capita income achieves this level, the rise of the middle class prompts demands for more equity in the distribution of economic and political power.
- Historical analogy: the 1960s in advanced economies—rise of the middle class → wave of social unrest and change → calls for more social justice, more democracy, and a better life → deep social and economic transformations.
- Scenario proposed: the 2010s could be for emerging economies what the 1960s were for advanced ones—a wonderful decade accompanied by major economic, social, and fiscal challenges.

### Spending surge in advanced economies and its financing
- Observed pattern in western countries: the rise of the welfare state (particularly increased spending for pension and health care) matched demands for social justice with a surge in public spending.
- Exact magnitude: the ratio between public spending and GDP increased by about 20 percentage points between the early 1960s and the early 1980s, essentially stabilizing since then.
- Financing path:
  - Initially financed by increased revenues while growth remained strong.
  - From the early 1970s, deficit financing became the dominant mode.
  - Result: a surge in the public debt-to-GDP ratio that lasted throughout the early 1990s.
  - Increases in tax rates—an increased mobilization of internal resources—eventually contained the rise in deficit and debt.
- Constraint observed post-2008: the trend increase in debt in advanced economies limited the possibility of supporting economic activity after the 2008–09 crisis, forcing governments to exit early from supportive fiscal policy.

### Risks for emerging markets and policy implications
- Key risks if emerging economies replicate spending surges:
  - Strong pressure to finance increased spending through increased debt accumulation.
  - Greater vulnerability to an increase in interest rates.
  - Reduced fiscal space to respond to unforeseen shocks.
  - Risk that once taxes reach a certain level they distort economic incentives and harm underlying growth potential.
- Uncertainties:
  - The tax level at which distortion occurs is unknown and likely differs across countries due to economic and cultural factors.
- Policy implication:
  - Emerging markets would have to manage potential surges in public spending carefully to avoid unsustainable debt dynamics and preserve growth.

### Key statistics and time markers (preserved exactly)
- "early sixties"
- "early 1960s"
- "early 1980s"
- "early 1970s"
- "2008–09 crisis"
- "early 1990s"
- Increase in the ratio between public spending and GDP: "about 20 percentage points"
- Decadal comparison: "the 2010s will be for emerging economies what the 1960s were for advanced ones"
- Per-capita income caption: "The average level of per capita income of emerging economies has now reached, in PPP real terms, approximately the level reached by advanced economies in the early sixties."

*Carlo Cottarelli, July 24, 2013.*

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## References

- [https://www.imf.org/wp-content/uploads/2013/07/real-gdp-per-capita-chart1.jpg](https://www.imf.org/wp-content/uploads/2013/07/real-gdp-per-capita-chart1.jpg)
- [https://www.imf.org/wp-content/uploads/2013/07/general-govt-expenditure-chart2.jpg](https://www.imf.org/wp-content/uploads/2013/07/general-govt-expenditure-chart2.jpg)
- [https://www.imf.org/wp-content/uploads/2013/07/general-govt-gross-debt-chart3.jpg](https://www.imf.org/wp-content/uploads/2013/07/general-govt-gross-debt-chart3.jpg)

_Source: https://www.imf.org/en/blogs/articles/2013/07/24/the-times-they-are-a-changin-will-fiscal-history-repeat-itself_