Fiscal Monitor Update: Strengthening Fiscal Credibility
IMF/Jan 27
The pace of fiscal consolidation in 2011 is now projected to be slower on average, and more varied across countries. The overall pace of deficit reduction in advanced economies in 2011 will be below earlier estimates. On average, fiscal consolidation among the advanced G20, measured in cyclically adjusted terms, is now projected to equal less than ¼ percent of GDP compared to the 1 percent of GDP projected in November. Their debt ratio is anticipated to rise by almost 5 percentage points, to exceed 107 percent of GDP.

A Two-Track Plan to Restore Growth
John Taylor (University of Stanford)/Wall Street Journal/Jan 28
The best way to reduce unemployment is to restore sound fiscal and monetary policies. There are some welcome signs that the policy pendulum has begun to swing back in that direction. The recent election revealed deep concern about high debt, deficits and spending. Three-fourths of business economists and one-half of academic economists say that easy monetary policy exacerbated the housing boom and bust that led to the financial crisis. Reactions to a second round of quantitative easing have been negative at home and abroad. The very word “stimulus” is now avoided by former proponents of spending stimulus. The recent agreement to extend existing income tax rates represents a shift to more predictable policies.
Conrad eyes alternate path for deficit reduction
Reuters/Jan 28
One day after budget forecasters projected a record $1.5 trillion deficit for this fiscal year, Democratic Senator Kent Conrad said he might use his post as Budget Committee chairman to force his colleagues to confront the country’s grim fiscal picture. “Who else is going to do it? That’s the frustration,” Conrad told reporters after a budget hearing.
CBO chief: Deficit problem really comes down to health care costs
MSNBC.com/Jan 27
The day after the Congressional Budget Office released its new estimate of a $1.5 trillion budget deficit for this fiscal year, CBO chief Douglas Elmendorf told the Senate Budget Committee that health care is the biggest driver of the budget problem.
CBO Director: Trillion-Dollar Deficits Risk ‘Fiscal Crisis’ in U.S.
Fox News/Jan 27
The top numbers cruncher for Congress warned Thursday that the federal government increasingly risks sending the country into a “fiscal crisis,” projecting that unless cuts are made, within a decade the national debt could reach nearly 100 percent of all annual economic activity.
Dangerous Game
The New Republic/Jan 28
Memo to Republicans: You’re rightly critical of George W. Bush’s fiscal performance. But there is no evidence—none—that you can get the deficit and debt under control with your preferred combination of spending cuts and tax cuts. Have you noticed that Paul Ryan’s famous Roadmap allows the national debt to reach 100 percent of GDP? Do you care about facts?
Memo to Democrats: Denouncing the proposal offered by the president’s [deficit] commission as a “cat food” budget for the elderly is a political talking-point, not a serious argument. Is Dick Durbin no longer liberal enough for you? Have you forgotten that fiscal restraint and full employment were partners, not adversaries, little more than a decade ago?
Memo to Obama: During your 2008 campaign, you said that the president has to be able to walk and chew gum at the same time. You were absolutely right. You can talk, as you should, about vital public investments and take the lead, as you must, to head off a fiscal train wreck.
Should Congress Raise the Debt Ceiling?
Ludwig von Mises Institute/Jan 27
Perhaps the strongest argument for not raising the debt ceiling is that the United States is bound to default — whether explicitly by reneging on payments, or implicitly by massive inflation — at some point anyway in the next decade or two. The government’s own projections show the debt quickly rising to alarming levels under certain assumptions, and none of their models deals with the possibility of a continued depression and a collapsing dollar. As others have noted, a firm debt ceiling would be a “balanced-budget amendment with teeth.” Politicians notoriously cannot recommend particular budget cuts for fear of alienating powerful interest groups. But if the newly elected budget “hawks” really wanted to impress us, they could refuse to raise the debt ceiling. Then they and their colleagues would have no choice but to start slashing.
Fiscal Adjustment and the Costs of Public Debt Service: Evidence from OECD Countries
Christoph A. Schaltegger (University of St. Gallen) and Martin Weder (University of Lucerne)/Center for Economic Studies/Dec 2010
…historically, governments have employed different fiscal adjustment strategies when confronted with high deficits and rising debt. Accordingly, these measures not only differ in duration, size and composition, but also in their success. Controlling for various economic, fiscal and political factors, we find that the size and the composition of a fiscal adjustment significantly affect long-term interest rates as well as yield spreads. Large adjustments and those that mainly depend on expenditure cuts lead to substantially lower interest rates. On the other hand, a budget consolidation that predominantly relied on tax increases, or on modest and gradual measures – even it was successful and led to lower deficits and debt levels – did not have an influence on interest rates. These results are significant and are robust to a variety of specifications and alternative models. We thus conclude that financial markets only seem to value strict and decisive measures. Therefore, expenditure cuts are a clear sign that the government’s pledge to cut the deficit is credible.
The U.S. Fiscal Imbalance and the Challenge for Tax Policy
Tax Policy Center/Jan 27
Three related issues dominate budget talk in Washington these days: eliminating the deficit, cutting spending, and reforming the tax system. Achieving the first will require accepting painful doses of the second and designing the third so we raise more revenue. No easy tasks there. The difficulty shows clearly in a graph I prepared for a recent talk for the Tax Section of the American Bar Association (slides are available here) . The graph plots spending and revenues using the latest budget estimates from the Congressional Budget Office. Balancing the budget means getting to the dark blue 45-degree line where spending matches revenues. The further northwest of the line, the bigger the deficit.

For most of the past four decades, the federal budget has been above that line. Spending has averaged just under 21 percent of gross domestic product (GDP), well above the 18 percent average for revenues. Only for a few years, from 1998-2001, have revenues fully paid the government’s bills—those four lonely dots below the diagonal line. And the last few years have found us well above the balanced budget line with deficits around 9 percent of GDP. Those huge recent deficits result mainly from reduced tax revenues due to the economic collapse and counter-cyclical policies on both the spending and the tax side.