## The Challenge of Debt Reduction during Fiscal Consolidation

_IMF Working Papers, March 8, 2013_

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## Bibliographic details
- Authors: Luc Eyraud, Anke Weber
- Published: March 8, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475553864.001

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### Summary
- Studies suggest that fiscal multipliers are currently high in many advanced economies.
- One important implication is that fiscal tightening could raise the debt ratio in the short term, as fiscal gains are partly wiped out by the decline in output.
- Although this effect is not long-lasting and debt eventually declines, it could be an issue if financial markets focus on the short-term behavior of the debt ratio, or if country authorities engage in repeated rounds of tightening in an effort to get the debt ratio to converge to the official target.
- The paper discusses whether these problems could be addressed by setting and monitoring debt targets in cyclically-adjusted terms.

### Key findings and concepts
- Fiscal multipliers are high in many advanced economies (no numeric multiplier values provided on the page).
- Short-term paradox: fiscal tightening may temporarily increase the debt ratio due to output declines offsetting fiscal gains.
- Debt dynamics:
  - Debt eventually declines following consolidation, but transient increases can occur.
  - Market focus on short-term debt behavior or repeated tightening rounds can exacerbate concerns about debt ratio convergence.
- Proposal examined: setting and monitoring debt targets in cyclically-adjusted terms to mitigate short-term distortions.

### Policy implications and considerations
- Monitor debt targets in cyclically-adjusted terms to account for output-driven fluctuations in the debt ratio.
- Be aware that short-term increases in the debt ratio following consolidation may not reflect long-term debt sustainability.
- Consider communication strategies with financial markets to contextualize short-term debt movements during consolidation episodes.
- Avoid repeated rounds of tightening aimed solely at meeting point-in-time debt targets without accounting for cyclical factors.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/the-challenge-of-debt-reduction-during-fiscal-consolidation-40381_