Use of countercyclical fiscal policy is impeded

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Desmond Lachman

Article Highlights

  • #IMF predicts #US will run a primary budget deficit around 8% of GDP this year, leading America down an unsustainable path

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  • US has no room for any fiscal policy manoeuvring #debt

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  • US primary budget #deficit has to invite comparisons with #Greek-style public debt dynamics #debt

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Sir, in reminding us how very different the present global economic cycle is from previous postwar economic cycles, Martin Wolf makes a number of fine points ("Struggling with a great contraction", August 31). However, the one salient point that he does not emphasise is how very compromised are the public finances in many major industrialised economies including the US, the UK, Japan, Italy and Spain. This has to limit the scope for countercyclical fiscal policy in the event of a renewed global economic downturn, which is bound to lengthen the duration of any such downturn.

Rather than view compromised public finances as a major impediment to the use of countercyclical fiscal policy, Mr Wolf asserts that the US still has the room for fiscal policy manoeuvre and that it should use that room. This assertion sits oddly with Standard & Poor's recent downgrade of US sovereign debt. It also sits oddly with the International Monetary Fund's estimates of the inordinately large size of the US budget deficit.

According to the IMF, the US will still run a primary budget deficit of around 8 per cent of gross domestic product this year. A primary budget deficit of that size has to place the US public finances on a clearly unsustainable path and has to invite comparisons with Greek-style public debt dynamics. In that context, it might be noted that Greece's primary budget deficit has now been reduced to the 3.5 per cent of GDP range.

Desmond Lachman is a resident fellow at AEI.

 

 

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About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202.862.5862
    Email: emma.bennett@aei.org

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