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Growth versus Austerity




Saturday 29 January, 14.00 - 15.00
How should nations develop their fiscal strategies to meet the twin challenges of economic growth and fiscal austerity?
The following dimensions will be addressed:
- Fiscal expansion versus contraction
- Labour market implications
- Cross-border effects
Key Points
Austerity measures like those championed by Prime Minister David Cameron of the United Kingdom may be premature and may decrease tax receipts and further strain budgets.
Deficit spending remains necessary for the time being, but the timing of switching off fiscal tools is the tricky part.
History has examples of disastrous results from premature abandonment of deficit spending leading to long periods of stagnation – the US in the 1930s, and Japan in the 1990s.
With the United States facing a US$ 1.5 trillion budget deficit and with Prime Minister David Cameron of the United Kingdom continuing to preach his message of austerity, the question before economists today is, “To cut, or not to cut?”
The general consensus among panellists was decidedly not to cut – at least not yet. Deficit spending was and probably is still necessary. Panellists offered little or no defence of the Tory approach to curing what ails Britain. In the US, where interest rates have gone to their lower limit of zero, economists argue that they are left with little choice but federal borrowing – that it is necessary to sustain a reasonable rate of economic growth.
The question, it was generally agreed, is for how long. Long enough, at least, it was agreed, until recovery is reasonably well established, until interest rates have come back to above-zero levels and other policies thereby become available. Such a time is in sight, though, and in order to bolster confidence, a wise policy would be to put in place in short order a plan for how to cut back on deficit spending for such time as interest rates do begin to rise.
Post-financial crisis episodes like the United States in the 1930s and Japan in the 1990s demonstrate the danger in premature declarations of victory in establishing cyclical expansion, and excessive lurches towards a focus on the long run. The issue is entirely about timing and gauging public confidence in the US’s ability to put its economic house in order without a crisis.
While one panellist argued that the choice between austerity and deficit spending is a false one, and that tough action over unaffordable pension bills that will come due unless controlled now can be taken even as short-term government stimulus spending continues. Others objected, suggesting that singling out social programmes and antagonizing ordinary wage earners is short-sighted folly.
Stanley Fischer, Governor of the Central Bank of Israel; Global Agenda Council on Fiscal Crises
Robert A. Johnson, Executive Director, Institute for New Economic Thinking (INET), USA
Edmund F. Kelly, Chairman and Chief Executive Officer, Liberty Mutual Group, USA
Lawrence H. Summers, Charles W. Eliot University Professor, Harvard University, USA
Peter Waldorff, General Secretary, Public Services International (PSI), France
Moderated by
Jon Williams, World News Editor, BBC World News, United Kingdom
This summary was prepared by Kaiser Kuo. The views expressed are those of certain participants in the discussion and do not necessarily reflect the views of all participants or of the World Economic Forum.Copyright 2011 World Economic Forum. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of the World Economic Forum. 
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