The debate on the need for further fiscal stimulus or quicker retrenchment has become too ideological, and too extreme. Underneath it, however, there is more agreement on the basics than may be apparent at first blush. Indeed, despite the warring comments that have appeared in these pages, there is actually no necessary conflict between restoring fiscal sustainability and maintaining support for the recovery.
Despite rising fears of a double-dip recession in both the US and UK in recent days, the basic facts remain unchallenged. Government debt in advanced Group of 20 countries will reach 115 per cent of gross domestic product by 2015 – almost 40 percentage points above pre-crisis levels. Some commentators look at these numbers and question the earlier fiscal stimulus. But only a 10th of this new debt is attributable to those attempts to boost their economies. The vast majority is due to the recession, and related revenue losses. No one believes that budgets should have been cut to offset this revenue loss. Indeed, allowing deficits to increase put a floor under what otherwise would have been a calamitous collapse in demand.
Today's debt problems, therefore, result not from how fiscal policy was managed during the crisis, but rather from how it was mismanaged before the crisis. Advanced countries entered the crisis with some of the highest public debt ratios ever reached in the absence of a major war. A basic fiscal policy lesson of sowing in good times and reaping in bad times was ignored.
