Beware governments sporting 90 per cent public debt-to-GDP ratios: that’s the conclusion of a new research paper from the ECB.
Up to 90-100 per cent, increasing public debt increases GDP growth, finds the research. Beyond this magic range, increasing debt is associated with ever lower growth rates (see chart, right).
More than this, debt-fuelled increases in the growth rate start to slow when public debt reaches 70-80 per cent of GDP. Austerians will be pleased. A handy map from the Economist, left, shows us which countries are likely to feel the heat first. But even German debt may classify.
The paper, by Cristina Checherita and Philipp Rother, looked at the average impact for 12 eurozone countries since 1970:
It finds a non-linear impact of debt on growth with a turning point—beyond which the government debt-to-GDP ratio has a deleterious impact on long-term growth—at about 90-100% of GDP.
Yes, you can now vote on the best way for the UK government to cut spending. It might take you a while: there were 44,000 suggestions and they have received only rudimentary classification.
Nonetheless, people are busy voting. Popular suggestions so far include: Read more
A baby born today in Italy will be supporting almost twice the elderly population of a baby born in the UK by 2050. (Assuming that child doesn’t realise the problem, and emigrate.)
With all the perspective that 10,000 miles provides, the Reserve Bank of Australia has given a summary of conditions in Europe as part of its quarterly monetary review.
A fiscal tightening comparison is instructive: the tightening is inversely proportional to the size of the economy, with France and Germany only forecast to tighten by 0.5 per cent each by the end of next year. Read more
Sir Alan Budd, interim chairman of the Office for Budget Responsibility, was on the money this morning in highlighting what a difficult job his successor faces. He said:
“No one in their right mind would take on a job in which your success is judged by your success in fiscal forecasts”.
The OBR is not alone in this plight. Members of the Monetary Policy Committee take interest rate decisions which are predicated on the Bank of England’s forecasts. But in having a decision as well as a forecast, the MPC is always able to claim that it took the right decision based on the information available at the time, which takes the focus away from its often poor forecasts.
So much for the communication surrounding errors. The origination of forecast errors is more important. And the OBR’s greater, though far from perfect, transparency shows that its Budget forecast hinges on very thin and quite weird stuff. Read more
Top brass in the OECD will be meeting with George Osborne and others tomorrow, to lay out a roadmap to “new growth” in the UK economy.
In United Kingdom: Policies for Sustainable Recovery, recommendations range from regulation to education, and from workers’ health to the green economy. The report recommends continued fiscal consolidation, while protecting areas such as R&D. Choice excerpts from the recommendations include: Read more
It’s been a bad two weeks for the Office for Budget Responsibility and today was the day Sir Alan wanted to repair some of the self-inflicted damage.
Although there was no apology given for tweaking the assumptions underlying the forecasts in the week before the Budget, nor for releasing the OBR’s forecasts for public sector jobs less than an hour before prime minister’s questions, Sir Alan did regret the consequences of his actions and any naivety on the OBR’s part.
The most important action of the OBR today is not in the public theatre of the OBR’s discomfort in front of the Treasury Select Committee, but in the release of the changed assumptions made shortly before the Budget and revealed by the FT. As shown below Read more
The latest warning on the fate of the global economic recovery today came from the International Monetary Fund, which rather ominously stated that the risks of a slowdown have risen considerably in recent months.
In that context, I came across a fascinating – and worrying - note by John Makin, a visiting scholar at the American Enterprise Institute, a Washington think-tank, and former consultant to the Treasury department.
Mr Makin, who is also a partner at Caxton, the hedge fund, is firmly in the camp of economists who believe deflation is emerging as the biggest danger to the economic recovery, and he eloquently lays out his case. Read more
European Union governments that persistently violate the bloc’s rules on low budget deficits and public debts could be denied EU financial aid under proposals unveiled on Wednesday by policymakers in Brussels.
The European Commission, which enforces the EU’s fiscal rules, also suggested that countries in the 16-nation eurozone should have to pay interest-bearing deposits into an EU fund if they ignored warnings to keep their public finances in order. Read more
Adam Posen has just finished speaking at the Society of Business Economists’ annual conference. He repeated regularly he was speaking for himself not the Bank of England or the Monetary Policy Committee. And his remarks were a breath of fresh air because he didn’t duck difficult issues nor assume them away. Two things stood out:
- Mr Posen’s conclusion that British inflation expectations are drifting up and neither one-off effects such as sterling’s depreciation nor higher commodity prices can fully explain the drift of inflation higher.
- British monetary policy is again walking on a tightrope, suspended above higher inflation on one side and a renewed downturn on the other, making monetary policy very difficult to set. This is likely to make it reactive not proactive and liable to large errors.
Rising inflation expectations Although many in the audience disagreed, Mr Posen’s argument on inflation expectations rested on the argument that Britain’s recovery has been broadly similar to other countries, but its inflation performance has been very different. This he argued was easiest to explain, not by sterling’s depreciation, but by persistent inflation overshoot and mildly adaptive inflation expectations the public hold, as the chart shows.
“The most logical and empirically reasonable explanation for inflation creep is some unanchoring of inflation expectations, caused by the series of above-target outcomes for UK inflation in recent years.”
In a welcome display of transparency, Read more
The US will have much less room to grow than it believes and should therefore tighten fiscal policy more rapidly, according to estimates by the International Monetary Fund.
In the first report of the G20’s “mutual assessment process”, by which leading economies are supposed to hold each other accountable for growth, the IMF suggests that the “advanced deficit countries” – dominated by the US – should tighten fiscal policy more rapidly than planned. Read more