Learning from Crisis Key to Restoring Economic Growth

Crisis lessons offer insight for future policy

Budget cuts work alongside growth-oriented policies

Growth challenged in light of spending cuts

With economic uncertainty still lingering over many economies, policymakers, academics, and senior IMF officials gathered for the 3rd Annual Fiscal Forum to discuss global fiscal issues.

A day earlier, the IMF released its latest analysis of government debt and deficits across the world, saying fiscal risks are declining for many countries but remain very high in others.

In its report, the IMF identified three key policy implications:

• Fiscal policy should proceed at a steady pace—not too slow, not too fast

• Implementing a clear medium-term fiscal adjustment plan is a key requirement for sustainable growth

• Growth enhancing measures are important for the fiscal accounts

Particularly for the advanced economies, the IMF said fiscal adjustment through spending cuts or tax hikes is necessary to help ensure continued progress toward sound public finances. The adjustment can be painful if deficits are slashed by too much and too quickly because this risks stifling economic growth.

A way out

Economists, policymakers, and academics differ among themselves about the right mix of fiscal tightening and growth-oriented policies needed for European economies to navigate a way out of the debt crisis, and to help other economies around the world that are also dealing with high debt and deficits and low economic growth.

Some are calling for a rethinking of the way countries are addressing their debt and deficit problems, saying that cuts in public spending and tax hikes are putting too much of a damper on growth and doing nothing to help the millions of unemployed. They would like to see countries spend more now to help with growth, while taking steps that would commit them to structural changes and deficit cutting measures a year or two down the road.

Yet others warn that if governments do not take concrete steps to reduce their deficit and overall debt today by cutting spending and raising taxes, financial markets could demand higher rates of interest on money they lend to governments to finance their deficits. Borrowing at higher rates of interest could result in unsustainable situations for those countries that are already saddled with high debt because it makes it extremely difficult for them to repay their debt in the future.

Part of the problem is there is no single prescription for determining...