Booms, Busts & Fiscal Policy - Public finances in the future?

Ludger Schuknecht
November 2009

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The financial crisis and the recession which followed marked the end of a decade of boom in many Western economies. Dr Ludger Schuknecht, a senior adviser at the European Central Bank, analyses what went wrong. Rising property prices and the irresponsible expansion in credit in a number of countries went hand in hand with increased private debt. Many governments ignored the opportunity to restore sound public finances and allowed public spending to grow too strongly. Such trends were particularly pronounced in the UK.

Dr Schuknecht explains the steps needed for sustainable recovery. The first priority must be to return the public finances to a sustainable path. Deficits must be reduced and public spending levels lowered. There is a strong case for reducing spending even beyond pre-crisis levels so it takes less than 40 per cent of GDP. Other changes will also be needed to deal with the costs of ageing populations. Real reform along these lines will help encourage a virtuous economic cycle with higher long - term growth and lower debt.

 

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