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Booms, Busts & Fiscal Policy – Public finances in the future?


This study is realized by Ludger Schuknecht, economist at the European Central Bank. He is making the case for the return to healthy and sustainable public finances. In that perspective, the authors identifies four central issues.

First, deficits and debts must be returned to a sustainable path. In many countries, deficits will need to fall by one percentage point of GDP per year and in some by much more. Even then, a balanced budget would only be reached in about 2015 for the average of the euro area and even later in the U.K.

Second, spending reform should be the main way to reduce deficits and debt and restore sound public finances. It will be highly prejudicial to the economy if the equilibrium in public finances is restaured thanks to higher taxes. On the contrary, it has to be achieved thanks to a reduction in government spending.

Third, social-security reform should also be introduced to contain fiscal pressures arising from aging populations. Unless there are further reforms, a growing tax burden or a crowding out of other spending is inevitable.

Fourth, structural reforms including those in the fiscal area are needed to reduce the likelihood of future booms and bust.

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