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"This analytical cross-country study of fiscal adjustment will be highly relevant for several countries, especially those in the euro area that, in the context of the new European governance, will follow a path of public debt reduction in the years ahead."
—Carlo Azeglio Ciampi, Emeritus President of the Italian Republic (President, 1999–2006; Finance Minister, 1996–1999) "Unfortunately, out of necessity, the issues of debt and deficit dominate the national debate in too many countries. The experience of others can often provide a guide to solutions—what to do and what not to do. In this context, this book will prove invaluable."
—The Right Honorable Paul Martin, former Finance Minister (1993–2002) and Prime Minister (2003–2006) of Canada
"Budget consolidation may well be the defining macroeconomic issue for the industrialized world over the next decade. The budget debate is as unbalanced as the budget. Ideology and rhetoric dominate in places where evidence and logic should dominate. This important book balances the debate by providing careful and analytic evidence on all the important tradeoffs. It is a must-read for everyone concerned about our fiscal future."
—Lawrence H. Summers, University Professor at Harvard University; former Director, National Economic Council (2009–2011); Secretary of the U.S. Treasury (1999–2001)
"Reducing public debt will be the main policy issue for the next decade. This volume greatly helps us understand how to do it in a way that achieves the intended objectives despite unexpected events that will inevitably occur. We don't know as much as we should about fiscal policy: this volume improves our understanding with a careful analysis of many international examples of fiscal adjustment. A great read."
—Alberto Alesina, Professor of Political Economy, Harvard University
"How should countries around the world deal with their burgeoning levels of national debt? This timely book's detailed case studies illustrate that though failure is common, there is also more than one path to success and a number of key principles that can serve as a guide to navigation."
—Alan J. Auerbach, Professor of Economics and Law, Director of the Burch Center for Tax Policy and Public Finance, University of California, Berkeley
"There are few questions more important in the U.S. and Europe today than how public debt will be brought under control. Chipping Away at Public Debt reviews a wealth of experience with large-scale fiscal adjustment plans in advanced economies, drawing on country studies as well as statistical analysis. The authors reach useful and sometimes unexpected conclusions. In particular, economic factors such as 'growth surprises' are perhaps even more important than political factors in determining success."
—Dani Rodrik, Professor of International Political Economy, John F. Kennedy School of Government, Harvard University
Table of Contents
Foreword ix Acknowledgments xi
Introduction xiii
CHAPTER 1 Canada: A Success Story 1
Cemile Sancak, Lucy Qian Liu, and Taisuke Nakata
Introduction 1
Background 2
Plans versus Outcomes: Macroeconomic Factors 7
Nature and Composition of Adjustment 13
Structural Reforms 21
Extent to which Adjustments Were Sustained 23
Conclusion 25
Notes 27
CHAPTER 2 United States: The Quest for Fiscal Discipline 31
Jiri Jonas
Introduction 31
First Attempt: Balanced Budget and Emergency Deficit Control Act 1985 33
Second Attempt: Omnibus Budget Reconciliation Act of 1990 36
Third Attempt: Omnibus Budget Reconciliation Act of 1993 38
Actual versus Projected Fiscal Performance under Omnibus Budget Reconciliation Act of 1993 42
1990s Deficit Reduction: Good Policy or Good Luck? 44
Easy Won, Easy Lost? 50
Conclusion 52
Notes 54
CHAPTER 3 France: Virtue and Fortune 57
Edouard Martin, Irina Tytell, and Irina Yakadina
Introduction: Factors Underlying the Need for Fiscal Consolidation 57
Early Attempts at Fiscal Adjustment 61
A First Attempt at Medium-Term Fiscal Consolidation, 1994–97 64
A More Systematic Approach to Medium-Term Budgeting: Consolidation Experiences under the Stability and Growth Pact 72
Conclusion 81
Notes 82
CHAPTER 4 Germany: Fiscal Adjustment Attempts With and Without Reforms 85
Christian Breuer, Jan Gottschalk, and Anna Ivanova
Introduction 85
1975–79 Consolidation Attempt 88
1981–85 Consolidation Attempt 93
1991–95 Consolidation Attempt 99
2003–07 Consolidation Attempt 105
Lessons 110
Notes 112
CHAPTER 5 United Kingdom: Four Chancellors Facing Challenges 115
Toni Ahnert, Richard Hughes, and Keiko Takahashi
Introduction 115
Selection of Consolidation Plans 116
Background, Content, and Performance of the Four Adjustment Plans 117
Determinants of Success and Failure 125
Lessons from Success and Failure 138
Appendix 5A. United Kingdom: Fiscal Adjustment Plans and Outturns 140
Notes 150
CHAPTER 6 Italy: Medium-Term Fiscal Planning under Frequent Government Changes 153
Fabrizio Balassone, Sandro Momigliano, and Pietro Rizza
Introduction 153
A Brief History of Italy’s Fiscal Planning Framework 155
Short-Term Origins of Medium-Term Failures 157
A Narrative of Design and Performance of Pre- and Post-European Monetary Unit Plans 162
Implementing Plans for the Year Ahead 165
Two Important Plans Analyzed in Detail 167
Conclusion 172
Notes 174
CHAPTER 7 Japan: Fiscal Adjustment Plans and Macroeconomic Shocks 177
Keiko Takahashi and Kiichi Tokuoka
Introduction 177
The 1997 Fiscal Structural Reform Act 178
Medium-Term Fiscal Adjustment Plans: Fiscal Year 2002 and the Following 189
Conclusion 203
Appendix 7A: The Bohn Fiscal Sustainability Test 206
Appendix 7B: Timeline of Medium-Term Fiscal Adjustment Plans in Japan 209
Notes 209
CHAPTER 8 The Performance of Large Fiscal Adjustment Plans in the European Union: A Cross-Country Statistical Analysis 213
S. Ali Abbas, Fuad Hasanov, Paolo Mauro, and Junhyung Park
Introduction 213
Data, Sample Selection, and Methodology 216
Descriptive Analysis 219
Regression Analysis 232
Conclusion 241
Appendix 8A: Data Issues and Cyclical Adjustment 243
Appendix 8B: Timeline for European Monetary Integration (1990–2009) 245
Notes 246
CHAPTER 9 Conclusion 249
Key Findings: What Failed and What Worked in Past Attempts at Fiscal Adjustment 251
Implications for Planned Adjustments 255
Notes 258
References 259
About the Project Team 267
Index 271
