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Douglas Sutherland: The Record and Characteristics of Fiscal Consolidation

Large fiscal challenges will confront OECD governments for some time to come. The economic crisis that began in 2008 caused deficits to surge, and fiscal imbalances were swollen further by stimulus measures and bank rescue operations. Together, these forces led to ballooning public indebtedness, the general government public debt-GDP ratio rising from under 80% of GDP in 2008 to almost 100% of GDP in 2010. In many countries, arresting the rise in debt and returning debt stocks to sustainable levels will require large and durable improvements in budget balances. With the economic recovery weak and hesitant, growing out of the fiscal problems is unlikely to be a durable solution, putting the onus in pursuing fiscal consolidation through spending cuts and revenue-raising measures. The size of the adjustment in many countries means that consolidation will continue to affect growth and also affect large spending areas, as revealed by fiscal consolidation intentions. However, there are a number of options that will have less detrimental impact, such as increasing spending efficiency and reforming unsustainable pension systems. Furthermore, reviews of tax and benefit systems could help identify how policy objectives could be achieved at lower cost and where support is less justified.

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