Chipping Away at Public Debt

PAOLO MAURO is a Division Chief in the IMF's Fiscal Affairs Department. He has published several articles in top economics journals and is coauthor of Emerging Markets and Financial Globalization: Sovereign Bond Spreads in 1870–1913 and Today. The IMF is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. Its Fiscal Affairs Department provides policy and technical advice on public finance issues to member countries.

• Foreword ix Acknowledgments xiIntroduction xiiiCHAPTER 1 Canada: A Success Story 1Cemile Sancak, Lucy Qian Liu, and Taisuke NakataIntroduction 1Background 2Plans versus Outcomes: Macroeconomic Factors 7Nature and Composition of Adjustment 13Structural Reforms 21Extent to which Adjustments Were Sustained 23Conclusion 25Notes 27CHAPTER 2 United States: The Quest for Fiscal Discipline 31Jiri JonasIntroduction 31First Attempt: Balanced Budget and Emergency Deficit Control Act 1985 33Second Attempt: Omnibus Budget Reconciliation Act of 1990 36Third Attempt: Omnibus Budget Reconciliation Act of 1993 38Actual versus Projected Fiscal Performance under Omnibus Budget Reconciliation Act of 1993 421990s Deficit Reduction: Good Policy or Good Luck? 44Easy Won, Easy Lost? 50Conclusion 52Notes 54CHAPTER 3 France: Virtue and Fortune 57Edouard Martin, Irina Tytell, and Irina YakadinaIntroduction: Factors Underlying the Need for Fiscal Consolidation 57Early Attempts at Fiscal Adjustment 61A First Attempt at Medium-Term Fiscal Consolidation, 1994–97 64A More Systematic Approach to Medium-Term Budgeting: Consolidation Experiences under the Stability and Growth Pact 72Conclusion 81Notes 82CHAPTER 4 Germany: Fiscal Adjustment Attempts With and Without Reforms 85Christian Breuer, Jan Gottschalk, and Anna IvanovaIntroduction 851975–79 Consolidation Attempt 881981–85 Consolidation Attempt 931991–95 Consolidation Attempt 992003–07 Consolidation Attempt 105Lessons 110Notes 112CHAPTER 5 United Kingdom: Four Chancellors Facing Challenges 115Toni Ahnert, Richard Hughes, and Keiko TakahashiIntroduction 115Selection of Consolidation Plans 116Background, Content, and Performance of the Four Adjustment Plans 117Determinants of Success and Failure 125Lessons from Success and Failure 138Appendix 5A. United Kingdom: Fiscal Adjustment Plans and Outturns 140Notes 150CHAPTER 6 Italy: Medium-Term Fiscal Planning under Frequent Government Changes 153Fabrizio Balassone, Sandro Momigliano, and Pietro RizzaIntroduction 153A Brief History of Italy’s Fiscal Planning Framework 155Short-Term Origins of Medium-Term Failures 157A Narrative of Design and Performance of Pre- and Post-European Monetary Unit Plans 162Implementing Plans for the Year Ahead 165Two Important Plans Analyzed in Detail 167Conclusion 172Notes 174CHAPTER 7 Japan: Fiscal Adjustment Plans and Macroeconomic Shocks 177Keiko Takahashi and Kiichi TokuokaIntroduction 177The 1997 Fiscal Structural Reform Act 178Medium-Term Fiscal Adjustment Plans: Fiscal Year 2002 and the Following 189Conclusion 203Appendix 7A: The Bohn Fiscal Sustainability Test 206Appendix 7B: Timeline of Medium-Term Fiscal Adjustment Plans in Japan 209Notes 209CHAPTER 8 The Performance of Large Fiscal Adjustment Plans in the European Union: A Cross-Country Statistical Analysis 213S. Ali Abbas, Fuad Hasanov, Paolo Mauro, and Junhyung ParkIntroduction 213Data, Sample Selection, and Methodology 216Descriptive Analysis 219Regression Analysis 232Conclusion 241Appendix 8A: Data Issues and Cyclical Adjustment 243Appendix 8B: Timeline for European Monetary Integration (1990–2009) 245Notes 246CHAPTER 9 Conclusion 249Key Findings: What Failed and What Worked in Past Attempts at Fiscal Adjustment 251Implications for Planned Adjustments 255Notes 258References 259About the Project Team 267Index 271

"This analytical cross-country study of fiscal adjustment will be highly relevant for several countries, especially those in the euro area that, in the context of the new European governance, will follow a path of public debt reduction in the years ahead." —Carlo Azeglio Ciampi, Emeritus President of the Italian Republic (President, 1999–2006; Finance Minister, 1996–1999) "Unfortunately, out of necessity, the issues of debt and deficit dominate the national debate in too many countries. The experience of others can often provide a guide to solutions—what to do and what not to do. In this context, this book will prove invaluable."—The Right Honorable Paul Martin, former Finance Minister (1993–2002) and Prime Minister (2003–2006) of Canada"Budget consolidation may well be the defining macroeconomic issue for the industrialized world over the next decade. The budget debate is as unbalanced as the budget. Ideology and rhetoric dominate in places where evidence and logic should dominate. This important book balances the debate by providing careful and analytic evidence on all the important tradeoffs. It is a must-read for everyone concerned about our fiscal future."—Lawrence H. Summers, University Professor at Harvard University; former Director, National Economic Council (2009–2011); Secretary of the U.S. Treasury (1999–2001)"Reducing public debt will be the main policy issue for the next decade. This volume greatly helps us understand how to do it in a way that achieves the intended objectives despite unexpected events that will inevitably occur. We don't know as much as we should about fiscal policy: this volume improves our understanding with a careful analysis of many international examples of fiscal adjustment. A great read."—Alberto Alesina, Professor of Political Economy, Harvard University"How should countries around the world deal with their burgeoning levels of national debt? This timely book's detailed case studies illustrate that though failure is common, there is also more than one path to success and a number of key principles that can serve as a guide to navigation."—Alan J. Auerbach, Professor of Economics and Law, Director of the Burch Center for Tax Policy and Public Finance, University of California, Berkeley"There are few questions more important in the U.S. and Europe today than how public debt will be brought under control. Chipping Away at Public Debt reviews a wealth of experience with large-scale fiscal adjustment plans in advanced economies, drawing on country studies as well as statistical analysis. The authors reach useful and sometimes unexpected conclusions. In particular, economic factors such as 'growth surprises' are perhaps even more important than political factors in determining success."—Dani Rodrik, Professor of International Political Economy, John F. Kennedy School of Government, Harvard University