Fiscal policy is no free lunch: Lessons from the Swedish fiscal framework for fiscal targeting
A number of economists are proposing a more expansionary fiscal policy based on debt financing, most noteworthy Olivier Blanchard in his presidential address at the ASSA meeting 2019 (Blanchard (2019).
In our view, the present push for fiscal activism is short-sighted. It has been tried before and failed.
Discretionary fiscal policy has a role to play in stabilising the economy but only during major economic crises such as a deep financial crisis. Instead, governments should stabilise the debt-ratio in normal times at a level that allows for ample borrowing and spending if and only if the economy suffers from a major crisis.
The new policy approach was successful (Andersson and Jonung 2019). As demonstrated by Figure 1, Swedish debt went from being one of the highest in Europe to one of the lowest from 1998 to 2017.
Consequently, we suggest an insurance approach for the design of the rules for public finances: fiscal policy should be framed today so it can successfully deal with the worst-case scenario of a deep financial crisis.
A low debt level before the crisis reduces the likelihood that the government has to implement major austerity measures during or immediately after a crisis with potentially devastating political effects of the type seen from recent events in Southern Europe.
Debt should not be too high, nor too low.
We do not claim to have established an optimal fiscal target – only a sufficient, precautionary or prudent level for the fiscal target based on the evidence from financial crises.
Fredrik N G Andersson, Lars Jonung 05 June 2019
Public Debt and Low Interest Rates
Olivier Blanchard AMERICAN ECONOMIC REVIEW
VOL. 109, NO. 4, APRIL 2019 (pp. 1197-1229)
https://www.aeaweb.org/articles?id=10.1257/aer.109.4.1197
Kommentarer