Fiscal consolidation

Economist
May 26, 2012

Most rich-world economies need to stabilise their debt-to-GDP ratio, according to the OECD’s latest “Economic Outlook”. This will require tightening the primary balance (before interest payments) of governments. The OECD expects its members to do this mainly by reining in spending—which is generally thought to be less of a drag on the economy than raising taxes. Fiscal consolidation in Greece, for example, is supposed to bring down the country’s deficit by 5% of GDP by 2013, largely through spending cuts. But this is still a painful process. By the OECD’s reckoning, reducing a government’s primary balance, as a share of GDP, by one percentage point typically cuts its growth rate by about 0.5%.

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