Larger budgetary adjustments are not always better

ACROSS much of the rich world an era of budget austerity beckons. Government debt is rising quicker than at any time since the second world war. By 2014 the broadcast debt of huge rich countries will reach an average of 110% of GDP, up by nearly 40 percentage points from 2007, according to the IMF (see chart). On current policies it will continue rising.

How to alter this bleak trajectory will be policymakers’ most hard task over the next decade. Financial markets are already forcing approximately into drastic action. Greece plans to cut its deficit from 12.7% of GDP in 2009 to 3% by 2013, using spending cuts, tax hikes and heroic growth projections. Portugal has rushed out plans to cut its deficit from 9.3% last year to 3% by 2013. Britain’s appointment will be fought over the contours of future austerity. …

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