The other exit strategy

Independent budget offices would help politicians’ promises to be prudent tomorrow.

Economic policymakers across the rich world face two delicate balancing acts over the new few years. The first, involving monetary policy is being widely discussed and carefully planned by teams of technocrats. Central bankers must keep their balance-sheets big and interest rates low for long enough to prevent deflation setting in, but they also have to be prepared to change things quickly to prevent inflation taking off. The second balancing act, involving fiscal policy, depends on politicians rather than specialists—and has, so far, been shamefully ill-planned.

In the short term public largesse is a necessary response to the slump in private demand. Budget deficits have ballooned-to and average of almost 10% of GDP across the big, rich countries-for good reasons, as governments have bolstered their banks and provided fiscal stimulus, and as sagging economies have sapped tax revenues. Withdrawing that support too fast would be foolish. Particularly after a banking bust, premature fiscal tightening can push weak economies back into decline, as Japan’s ill-timed consumption-tax increase in 1997 showed. The same risk holds today, particularly if the fiscal squeeze involves incentive-dulling tax increases.

But public profligacy cannot last for ever. Even if the nascent recovery takes hold, the IMF reckons the gross government debt of the rich world’s big economies will reach all average of 115% of GDP by 2014 and continue to rise thereafter in some places, notably America. The weight of this debt will eventually push up interest rates, crowd out private investment and sap economic growth. Far nastier outcomes, from out-of-control inflation to outright default, are conceivable.