{
  "title": "Taming government debt—it can be done, but it ain’t easy",
  "publication": "IMF Blog, September 25, 2013",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2013/09/25/taming-government-debt-it-can-be-done-but-it-aint-easy",
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  "summary": "Authors: Helge Berger, Justin Tyson",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Authors: Helge Berger, Justin Tyson\n- Date: September 25, 2013\n- Central message: Government debt in advanced economies, elevated after the global economic and euro area crises, will need to be reduced. There is no single “magic” safe debt ratio; reduction comes with trade-offs because cutting spending or raising taxes risks lowering growth and employment in the short term."
    },
    {
      "heading": "The ins and outs of debt reduction",
      "content": "- Key mechanisms that reduce debt:\n  - Higher economic growth increases government revenues, reduces unemployment benefits, and lowers the debt-to-GDP ratio.\n  - Fiscal consolidation (reducing government deficits) is the alternative when rapid growth is not available.\n- Constraints and complications:\n  - Current environment features cautious household spending, stretched bank balance sheets, low inflation, and limited prospects for quickly conjuring high growth.\n  - Attempts to raise inflation to reduce real debt could backfire if inflation expectations are not well anchored.\n  - Fiscal consolidation in a weak-growth, high-debt context can initially increase the debt-to-GDP ratio because lower demand reduces revenues and the GDP denominator.\n  - Lower borrowing costs from credible consolidation rarely offset the short-run demand loss.\n  - If a country is losing market access, fiscal effort may need to be front-loaded.\n- Empirical findings:\n  - Fiscal balances are a key driver of changes in debt-to-GDP ratios, but growth matters strongly.\n  - Debt reductions tend to be larger when growth rates are high and interest rates are low.\n  - Debt reversals are fewer and smaller when both growth is low and interest rates are high.\n  - Only 26 percent of fiscal consolidation efforts (defined as a large adjustment in fiscal balances ignoring interest rate payments) were successful when growth is below a country’s historical average.\n  - When growth is above average, the success rate of consolidation increases to 41 percent."
    },
    {
      "heading": "Past experience — reducing debt when growth is low is possible",
      "content": "- Sample: 26 episodes of debt reductions in advanced economies since 1980.\n- Findings from these episodes:\n  - Growth and fiscal effort were the main drivers of successful debt reductions.\n  - Some episodes achieved large debt reductions despite starting conditions of anemic growth and very high debt burdens.\n  - Common factors in successful episodes:\n    - Early start to consolidation and persistence through initial weak growth.\n    - Continued consolidation as growth recovered, allowing debt to fall.\n    - Fortuitous improvements such as falling short-term interest rates, currency depreciation, and solid export growth—channels less available in the current near-zero interest rate, slow global trade environment."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Pace and design:\n  - Consolidation should generally be gradual where possible, supported by credible medium-term plans to spread adjustment over time.\n  - If a country is close to losing market access, stronger, front-loaded consolidation may be unavoidable.\n- Complementary measures:\n  - Enact measures now that increase medium-term growth, including structural reforms.\n  - Consider privatization of government assets in some economies to reduce the need for fiscal consolidation.\n- Expectations:\n  - For most countries, bringing down the public debt-ratio will require a sustained fiscal effort for a number of years.\n  - Perseverance with credible plans and strong budget institutions improves the chances that consolidation will pay off over time.\n\nSource: Taming government debt—it can be done, but it ain’t easy — Helge Berger, Justin Tyson; September 25, 2013.\n\n---\n\n Content in this bundle\n\n- Staff Discussion Note\n  - Staff Discussion Note (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Staff Discussion Note (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- https://www.imf.org/wp-content/uploads/2013/09/figure-1-dev-in-gross-debt-and-structural-balance-in-adv-economies.jpg\n- https://www.imf.org/wp-content/uploads/2013/09/figure-2-avg-annual-contributions-to-reductions-in-debt-under-diff-macro-conditions.jpg\n- https://www.imf.org/wp-content/uploads/2013/09/figure-3-components-of-major-debt-reductions-in-adv-economies.jpg\n- https://www.imf.org/wp-content/uploads/2013/09/figure-4-evolution-of-key-variables-through-deficit-reduction.jpg\n\nSource: https://www.imf.org/en/blogs/articles/2013/09/25/taming-government-debt-it-can-be-done-but-it-aint-easy"
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    "Authors: Helge Berger, Justin Tyson",
    "Published: September 25, 2013",
    "Authors: Helge Berger, Justin Tyson",
    "Date: September 25, 2013",
    "Central message: Government debt in advanced economies, elevated after the global economic and euro area crises, will need to be reduced. There is no single “magic” safe debt ratio; reduction comes with trade-offs because cutting spending or raising taxes risks lowering growth and employment in the short term.",
    "Key mechanisms that reduce debt:",
    "Constraints and complications:",
    "Empirical findings:",
    "Sample: 26 episodes of debt reductions in advanced economies since 1980.",
    "Findings from these episodes:",
    "Pace and design:",
    "Complementary measures:",
    "Expectations:",
    "**Staff Discussion Note**",
    "[https://www.imf.org/wp-content/uploads/2013/09/figure-1-dev-in-gross-debt-and-structural-balance-in-adv-economies.jpg](https://www.imf.org/wp-content/uploads/2013/09/figure-1-dev-in-gross-debt-and-structural-balance-in-adv-economies.jpg)",
    "[https://www.imf.org/wp-content/uploads/2013/09/figure-2-avg-annual-contributions-to-reductions-in-debt-under-diff-macro-conditions.jpg](https://www.imf.org/wp-content/uploads/2013/09/figure-2-avg-annual-contributions-to-reductions-in-debt-under-diff-macro-conditions.jpg)",
    "[https://www.imf.org/wp-content/uploads/2013/09/figure-3-components-of-major-debt-reductions-in-adv-economies.jpg](https://www.imf.org/wp-content/uploads/2013/09/figure-3-components-of-major-debt-reductions-in-adv-economies.jpg)",
    "[https://www.imf.org/wp-content/uploads/2013/09/figure-4-evolution-of-key-variables-through-deficit-reduction.jpg](https://www.imf.org/wp-content/uploads/2013/09/figure-4-evolution-of-key-variables-through-deficit-reduction.jpg)"
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