Prudent or Profligate

• Author: Paolo Mauro, Rafael Romeu, Ariel Binder, and Asad Zaman
• Position: an Assistant Director in the IMF's African Department. is a Senior Economist, and and are Research Analysts, all in the IMF's Fiscal Affairs Department.­

Whether governments are taking sufficient measures to ensure the sustainability of public debt has become an important public policy question as sovereign debt has risen to unprecedented peacetime levels. Political realities and weak economic growth often call for delayed expenditure cuts or tax increases, but a high or potentially rising interest burden would argue for the opposite—fiscal adjustment—by raising revenues, trimming spending, or both.Â

Are countries doing enough to reduce their deficits in response to increases in their debt-to-GDP ratios? Are fiscal (tax and spending) policies sufficiently prudent, or are countries behaving in a profligate manner? And how can fiscal “prudence” or “profligacy” be assessed empirically? Answers to these questions cannot be based on data for only one or even a few years. Rather, they require a longer-term perspective and call for delving into some fascinating economic history.Â

Economists have increasingly drawn on historical data to analyze fiscal issues. For example, in This Time Is Different, Harvard professors Carmen M. Reinhart (see People in Economics in this issue of F&D) and Kenneth S. Rogoff look back at eight centuries of public debt and fiscal crises. In a recent study we examined 55 countries’ fiscal policy decisions during 1800–2011 (Mauro and others, 2013), using the most comprehensive cross-country data set assembled to date (see box).Â

The history of public finances

The IMF's new database, Public Finances in Modern History (IMF), documents 200 years of budget deficits and government debt. The data cover 55 countries—24 of them considered advanced economies. Half of the observations are drawn from historical publications that cover many countries; the

other half were collected from country-specific sources such as government publications or economic histories that include

public finance statistics. The data set consists of both fiscal stocks (such as the level of government debt at a particular

moment) and flows (such as spending and revenue collection), which makes it possible to document the primary balance of

governments far back in history.

The data begin in the early 1800s for a handful of countries (for example, Sweden, United Kingdom, United States), and the coverage gradually increases—to more than 20 countries by 1880 (a geographically diverse group that includes Argentina, India, and Japan). By the 1920s the coverage reaches about 30 countries (including several "emerging markets").

Chart 1 illustrates the breadth of the data set. It presents the GDP-weighted average of the historical primary balance for the countries in the sample over the past century and a half. It is apparent, for example, that the worsening in the primary balance experienced during the global economic and financial crisis that began in 2008 is exceeded only by that associated with the two world wars.

We found, for example, that the authorities often mistake a persistent decline in economic growth for a temporary slowdown and...