Ten commandments for fiscal adjustment in advanced economies

by Olivier Blanchard and Carlo Cottarelli

Vox
June 28, 2010

The G20 communiqué stresses the difficulty of balancing fiscal stimulus and fiscal consolidation. This column – written by one of the world’s leading macroeconomists, Olivier Blanchard, and his co-author – sums up the research-based policy analysis of the issue.

Advanced economies are facing the difficult challenge of implementing fiscal adjustment strategies without undermining a still-fragile economic recovery. Fiscal adjustment is key to high private investment and long-term growth. It may also be key, at least in some countries, to avoiding disorderly financial market conditions, which would have a more immediate impact on growth through effects on confidence and lending. But too much adjustment could also hamper growth, and this is not a trivial risk. How should fiscal strategies be designed to make them consistent with both short-term and long-term growth requirements?

We offer ten commandments to make this possible. Put simply, what advanced countries need is clarity of intent, an appropriate calibration of fiscal targets, and adequate structural reforms – with a little help from monetary policy and their (emerging market) friends.

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