Beyond the Austerity Debate: the Deficit Bias in the post-Bretton Woods Era

The growth versus austerity debate is detracting attention from policy issues that may seem less urgent, but which are nevertheless critical in the medium term. I am referring to what I would call the institutional gaps in fiscal policymaking that still exist in most advanced and emerging economies. These gaps have contributed to a bias in the conduct of fiscal policy in favor of deficits that is behind many of the current problems.

Making Goldilocks Happy

We have calculated that an increase in annual long-term economic growth of just a quarter of a percentage point could set in place a virtuous circle that would lead, after ten years, to a decline in the public debt-to-GDP ratio by 6 percentage points. This is because higher growth makes it easier to run a primary surplus and lowers the public debt-to-GDP ratio directly. This in turn lowers the interest rate, which in turn boosts economic growth.

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