Deputy managing director of the International Monetary Fund (IMF), John Lipsky, painted a grim picture for world leaders at the China Development Forum last week. The average government debt of advanced economies is predicted to hit 110% GDP by 2015 - up from 75% in 2007. Politicians, he warned, must temper public opinion to the austerity that will be required to pay it back.
The efficacy of fiscal stimulus measures is a long-standing debate among economists; John Maynard Keynes advocated government intervention in the wake of the last comparably severe depression of the 1930s. The idea runs that increasing government spending and lowering taxes (variously combined) will stimulate demand in the economy, leading to growth and decreased unemployment. In the UK, for example, the Treasury estimates that a £1bn injection will create a £1.4bn increase in activity, which in turn improves government finances by £1.05bn.
Yet does this work in practice? Critics warn that continuing to spend can be counter-productive; the government must borrow money to give back out, but if the markets think public finances are out of control, the interest rates they charge become increasingly high. This impacts upon interest rates for personal borrowers, decreasing demand in the economy, and negating any benefits the initial outgoing might have had.
Each dollar, euro or yuan spent by the government, it is argued, is one that is not spent by the private sector, and for every stimulus-born job, one is lost due to a decline in private consumption - a phenomenon known as 'crowding out'.
But governments have not yet stopped spending: the Asian giants have warned it is too early to cut back; the German stimulus has been credited with minimising job losses; US president Barack Obama has championed the effects of his own measures; and fiscal policy is a key battleground of the impending general election in the UK. The IMF, for its part, warns that to stop the flow now could result in a double-dip recession.
With all G20 countries but Britain and Argentina planning to continue their fiscal support beyond 2010, it appears, for the time being at least, consensus exists that it is too early to tighten the purse strings. It remains to be seen how effective this tactic will prove in the long run.
The efficacy of fiscal stimulus measures is a long-standing debate among economists; John Maynard Keynes advocated government intervention in the wake of the last comparably severe depression of the 1930s. The idea runs that increasing government spending and lowering taxes (variously combined) will stimulate demand in the economy, leading to growth and decreased unemployment. In the UK, for example, the Treasury estimates that a £1bn injection will create a £1.4bn increase in activity, which in turn improves government finances by £1.05bn.
Yet does this work in practice? Critics warn that continuing to spend can be counter-productive; the government must borrow money to give back out, but if the markets think public finances are out of control, the interest rates they charge become increasingly high. This impacts upon interest rates for personal borrowers, decreasing demand in the economy, and negating any benefits the initial outgoing might have had.
Each dollar, euro or yuan spent by the government, it is argued, is one that is not spent by the private sector, and for every stimulus-born job, one is lost due to a decline in private consumption - a phenomenon known as 'crowding out'.
But governments have not yet stopped spending: the Asian giants have warned it is too early to cut back; the German stimulus has been credited with minimising job losses; US president Barack Obama has championed the effects of his own measures; and fiscal policy is a key battleground of the impending general election in the UK. The IMF, for its part, warns that to stop the flow now could result in a double-dip recession.
With all G20 countries but Britain and Argentina planning to continue their fiscal support beyond 2010, it appears, for the time being at least, consensus exists that it is too early to tighten the purse strings. It remains to be seen how effective this tactic will prove in the long run.
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