Willem H. Buiter

Excessive deficits: sense and nonsense in the Treaty of Maastricht

In this paper we evaluate internationally agreed limits on public sector debt and deficits, such as those agreed by the EC countries in the Treaty of Maastricht as preconditions for membership in a monetary union. These fiscal convergence criteria require that general government budget deficits should not exceed 3% of GDP and that the gross debt of the general government should not be above 60% of GDP. The Maastricht requirements, especially the debt criterion, are much more stringent than those required to ensure public sector solvency. Their implementation would require an excessive degree of fiscal retrenchment which would adversely affect the level of economic activity. The deficit guideline does not appear to be sensible, since the numerical criterion refers to the nominal interest payments-inclusive financial deficit, with no corrections for inflation and real output growth, no cyclical adjustment and no appropriate allowance for future revenue-producing public sector investment. The verbal qualifications are too vague to neutralize the potential for serious damage attached to the numerical guidelines. We discuss the various `externality arguments in favour of binding fiscal rules and find them wanting, both theoretically and empirically. An argument in favour of external enforcement of binding fiscal rules might be made in the presence of `excessive deficits due to political distortions. We conclude that the fiscal convergence criteria should be disregarded or applied quite loosely in order to avoid the risk of serious fiscal overkill.

A guide to public sector debt and deficits

Government deficits reinterpretednnWillem H. BuiternnPublic sector debt and deficits are a matter of concern to governments throughout the world. After presenting data on the public debt and deficits in the UK and abroad, this paper considers four key issues. First, does an increase in the budget deficit today make an increase in inflation in the future more likely? In economies like the UK the answer is no, because the scope for raising revenue by money creation is limited compared to raising taxes. Second, how does one evaluate the consistency of a given spending and tax programme? A number of measures are presented which indicate the adjustment that must be made to spending and tax plans if the government is to remain solvent. Third, it is often argued that an increase in budget deficits will merely crowd-out private spending. The paper shows that the truth of this proposition depends critically on the state of the economy, the time horizon, and whether the increased deficit is temporary or permanent. Finally the question of deriving a suitable measure of fiscal stance is considered. Developing an index of fiscal impact requires a suitable economic model and a number of different measures are considered and criticized. Conventional deficit measures, whether actual, cyclically-corrected, or inflation corrected, are a poor indicator of the governments true fiscal stance.

Rewarding the profligate and punishing the prudent and poor: Some recent proposals for debt relief

At a conference organized in June 1986 by the Overseas Development Council on the future of The World Bank, former West German Chancellor Helmut Schmidt, investment banker Felix Rohatyn and the Chairman of the Federal Reserve Board Paul Volcker all suggested that the massive (

Persistent differences in national productivity growth rates with a common technology and free capital mobility: The roles of private thrift, public debt, capital taxation, and policy toward human capital formation

60 billion) trade surplus of Japan be mobilized to solve what they termed as the debt problem of the Third World. Mr Barber Conable, the new president of the World Bank is quoted by the New York Times (3 July 1986) as saying “Clearly, there is the expectation that Japan, in view of the light defense burden it carries will participate fully in (solving) collective debt problems of the world.” He characterized the Japanese surpluses as “a considerable world asset” and suggested that establishing a special facility (such as the one established by the IMF in the 1970s to tap Saudi Arabia’s surplus petro dollars) to recycle them “would be one way of dealing with it.” Nearly a year ago in October 1985 at the annual meetings of the World Bank and IMF at Seoul US Treasury Secretary James Baker signaled a shift in the US approach to the debt crisis. The Baker Plan aimed to help highly indebted middle-income countries (15 were mentioned by Baker, 10 of them in Latin America) resume growth and achieve adjustment towards a sustainable debt position through the adoption of the following course of action by lenders, debtors and multilateral agencies: within the context of the (then) prevailing IMF-supervised case-bycase approach, commercial banks, the World Bank and other multilateral development banks were to increase lending to these countries. Baker suggested that the commercial banks commit a total of

A VIABLE GOLD STANDARD REQUIRES FLEXIBLE MONETARY AND FISCAL POLICY

20 billion in net new lending over 198688 and the multilateral development banks an additional

Debt neutrality, Professor Vickrey and Henry George's 'single tax'

9 billion during the same period. This increased net lending was to be in support of the adoption of market-oriented policies by indebted nations. Growth was to be promoted, inflation reduced and external balance restored by expanding the role of the private sector and of markets, both domestically and internationally. The first offspring of the Baker Plan is the recent “growth-oriented” adjustment plan for Mexico, which was foisted upon a reluctant IMF (perhaps the world’s last unreconstructed bastion of adjustment through austerity) by the combined pressure of the US Treasury and Federal Reserve Board and the Mexican threat of repudiation. (The IMF’s reservations concerned the budgetary features of the package, not the novel real growth and oil price contingency clauses, which it supported.) The 18-month standby arrangement with the IMF provides Mexico with SDR 1.4 billion (about

Some thoughts on the Brady plan: Putting a fourth leg on the donkey?

1.7 billion) in support of what is described as a comprehensive program of adjustment and structural reform. The total financing package amounts to

Efficient ‘myopic’ asset pricing in general equilibrium: A potential pitfall in excess volatility tests

12 billion of which

Tipos de cambio flexibles e interdependencia

6 billion is to come from the commercial banks. Mexico’s economic problems had of course been intensified dramatically as a result of the drop in the price of oil. Policies aimed at bringing Mexico’s real GDP growth to 3.5% by 1987 (from recent negative growth rates of 4 or 5%) involve a variety of growth-oriented, market-friendly adjustment measures (increased public investment, current expenditure cuts, tax reform measures, marketbased adjustments in tariffs and prices charged by public sector enterprises, liberalizing trade measures (Mexico is about to join the GA7T) and only very mild (by traditional IMF standards) budgetary restraint (a reduction in the deficit-GDP ratio by three percentage points over 1986-87). The aspect of the Mexican program of most interest for this discussion is the actions taken

Debt, deficits, and inflation: An application to the public finances of India

Abstract The paper develops a two-country endogenous growth model to investigate possible causes for the existence and persistence of productivity growth differentials between nations despite a common technology, constant returns to scale, and perfect international capital mobility. Private consumption is derived from a three-period overlapping generations specification. The source of productivity (growth) differentials in our model is the existence of a nontraded capital good (“human capital”) whose augmentation requires a nontraded current input (time spent by the young in education rather than leisure). We consider the influence on productivity growth differentials of private thrift, public debt, the taxation of capital and savings, and policy toward human capital formation.