The Ten Commandments
Unbeknownst to the public, Olivier Blanchard and Carlo Cottarelli ascended Mt. Sinai at some point earlier this year. Last week, they came down with the Ten Commandments for Fiscal Adjustment. In their IMF blog post, they make recommendations for how G-20 countries can have successful and productive fiscal consolidations. The commandments are below:
Commandment I: You shall have a credible medium-term fiscal plan with a visible anchor.
Commandment II: You shall not front-load your fiscal adjustment, unless financing needs require it.
Commandment III: You shall target a long-term decline in the public debt-to-GDP ratio, not just its stabilization at post-crisis levels.
Commandment IV: You shall focus on fiscal consolidation tools that are conducive to strong potential growth.
Commandment V: You shall pass early pension and health care reforms as current trends are unsustainable.
Commandment VI: You shall be fair. To be sustainable over time, the fiscal adjustment should be equitable.
Commandment VII: You shall implement wide reforms to boost potential growth.
Commandment VIII: You shall strengthen your fiscal institutions.
Commandment IX: You shall properly coordinate monetary and fiscal policy.
Commandment X: You shall coordinate your policies with other countries.
Commandments I and III are especially central to CRFB's message, and we are working on VIII with the Peterson-Pew Commission on Budget Reform. Commandment II is an important one in the context of the current debate about the timing of cutbacks, and the two took a page out of the Announcement Effect Club when they said "while front-loading fiscal tightening is, in general, inappropriate, front-loading the approval of policy measures...will enhance the credibility of the adjustment." Interestingly, they also took a page out of Paul Krugman's book with the ninth commandment, stating that "if fiscal policy is tightened, interest rates should not be raised as rapidly as in other phases of economic recovery."
However, the crux of the success of fiscal adjustments will be in Commandments IV-VII. Unfortunately, these commandments can sometimes conflict with each other. Generally, economists agree that spending cuts are less harmful to economic growth, which complies with the fifth commandment, but may violate the sixth. Also, the seventh commandment, which emphasizes the promotion of investment, may require new spending or tax cuts that would be at odds with a fiscal consolidation plan. The fifth commandment is an absolute must, but how they do it requires walking a tightrope between growth and equity. Either way, the IMF's Ten Commandments show that HOW you consolidate is important along with IF you consolidate.