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Climbing Out of Debt

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Climbing Out of Debt

A new study offers more evidence that cutting spending is less harmful to growth than raising taxes

IMF,

5 min read
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Developed economies’ indebtedness now averages more than 100% of GDP.

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Years after the Great Recession, a glut of debt afflicts the world’s advanced economies. As central banks begin to close the door on accommodative monetary policies, interest rates will rise and the debt burden will increase. World leaders will have to figure out how to service rising interest payments while enabling economic growth. Economists Alberto Alesina, Carlo A. Favero and Francesco Giavazzi make cogent arguments for spending reductions rather than tax hikes to boost economic activity. getAbstract suggests this clear and compelling read to economists and analysts. 

Summary

The Great Recession left the developed world’s economies mired in debt. Even after a slow recovery, the average national debt still equals 104% of GDP, with Japan at 240%, Greece at nearly 185%, and Italy and Portugal at more than 120%. As interest rates go up, governments will spend more money on loan payments and less on improving roads and schools and investing in future growth. Governments can lower debt by deficit reduction – either through spending cuts or revenue generation – or through economic growth. Policy makers need to devise a solution that cuts deficits...

About the Authors

Alberto Alesina is a professor at Harvard University. Carlo A. Favero and Francesco Giavazzi are professors at Bocconi University in Milan.

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    A. J. 5 years ago
    Not quite support the logic driven out of this article. Deficit spending is a great source for wealth redistribution as against tax reduction which works for wealth concentration. And wealth concentration always hastens recession. If we try reducing debt to GDP ratio via tax reduction, I think we are hastening recession and thereby promoting increased debt financing