Restoring Debt Sustainability After Crises: Implications for the Fiscal Mix
IMF Working Papers, October 1, 2010
Source details
- Canonical URL
- Restoring Debt Sustainability After Crises: Implications for the Fiscal Mix
Other formats
Bibliographic details
- Authors: Emanuele Baldacci, Sanjeev Gupta, Carlos Mulas-Granados
- Published: October 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455209323.001
Summary
- Paper analyzes the experience of 99 advanced and developing economies in restoring fiscal sustainability during 1980 - 2008 after banking crises, which led to large accumulation of public debt.
- Primary finding: successful debt reductions relied chiefly on generation of large primary surpluses in post-crisis years through current expenditure cuts.
- These savings were accompanied by growth-promoting measures and a supportive monetary policy stance.
- Additional finding: revenue-raising measures increased the likelihood of successful consolidation in countries that faced large adjustment needs after the crisis, reflecting the fall in effectiveness of spending cuts when deficit reduction needs are large independent of initial tax ratios.
Key Findings and Evidence
- Sample: 99 advanced and developing economies.
- Period analyzed: 1980 - 2008.
- Mechanism of successful debt reduction:
- Large primary surpluses in post-crisis years.
- Current expenditure cuts as the chief driver of these surpluses.
- Complementary growth-promoting measures.
- Supportive monetary policy stance.
- Conditional role of revenue measures:
- Revenue-raising measures increased the likelihood of successful consolidation in countries with large adjustment needs after the crisis.
- Effect interpreted as due to reduced effectiveness of spending cuts when deficit reduction needs are large, independent of initial tax ratios.
Policy Implications
- Prioritize measures that generate large primary surpluses when restoring debt sustainability after banking crises.
- Emphasize current expenditure restraint as a primary consolidation tool in post-crisis years.
- Combine fiscal consolidation with growth-promoting measures to support recovery and debt reduction.
- Maintain a supportive monetary policy stance during the consolidation phase to facilitate recovery.
- In cases of large adjustment needs, complement expenditure cuts with revenue-raising measures because spending cuts alone lose effectiveness irrespective of initial tax ratios.