Wednesday, September 7, 2011

UNCTAD against fiscal austerity

The Trade and Development Report (TDR, 2011) has been published.  It says many important things, but I think that what stands out in the the current environment is its defense against fiscal austerity.  It says:
"The current obsession with fiscal tightening in many countries is misguided, as it risks tackling the symptoms of the problem while leaving the basic causes unchanged. In virtually all countries, the fiscal deficit has been a consequence of the global financial crisis, and not a cause. (...) Policymakers should not focus only on debt stock. They need to consider the relationship between the stock of debt and the flow variables, including interest rates and fiscal revenues that affect a country’s ability to support its debt. A major factor that influences changes in the burden of public debt is GDP growth: it is virtually impossible to lower high debt-to-GDP ratios when an economy is stagnant, unless the debtor obtains a significant debt reduction. Hence, the level of a country’s fiscal deficit (or surplus) needs to be viewed from a more holistic and dynamic perspective, in the context of its impact on the sustainability of a country’s financial position and on its economic stability and growth prospects."
Economic growth is the way out of debt, and that should be done with more deficits now.

PS: The NYTimes has a story citing Heiner Flassbeck the head of the Division that writes the TDR report.

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