To help ensure that advanced country governments have sufficient flexibility to respond to future crises, it is important that finance ministries aim for a ratio of public debt to GDP that is substantially less than 60% in normal times.
To help ensure that advanced country governments pursue responsible fiscal policies, countries should adopt formal rules for limiting structural deficits, which are supported by primary legislation or constitutional reform.
This pilot of the CFM survey focuses on an important but difficult question, namely whether more discipline should be imposed on long-term fiscal policy. The first question focuses on the ratio of public debt to GDP and the second question focuses on the deficit.
Since the outbreak of the financial crisis, the ratio of public debt to GDP has sharply increased in most developed countries and the yield on government debt increased substantially in many of these countries and may become particularly volatile as policy rates normalise. High public debt to GDP ratios and the scope for increased costs of borrowing may place considerable constraints on the future ability of governments to pursue stabilization policies to stimulate the economy.
Advanced countries may yet fully recover from the recent financial crisis nevertheless, there are likely to be other episodes in which government liabilities may increase sharply. Moreover, government liabilities may increase as the baby boomer generation leaves the work force. Before the recent financial crisis, a ratio of sovereign debt to GDP below 60% was considered unproblematic for developed countries.
The first survey question asks whether governments should target much lower ratios in normal times. The question asks whether the target ratio should go down, but is silent on whether the target should be for gross debt or for net debt. The advantage of using gross debt is that reported numbers are less easy to manipulate whereas the advantage of using net debt is that it better represents the total burden carried by the government sector.
The second survey question asks whether constitutional amendments should be imposed to restrict the size of the fiscal deficit. Several developed countries are considering or have already approved amendments to their constitutions to introduce constraints on the scope to run discretionary fiscal policy. The German constitution has been amended to introduce the "Schuldenbremse" (debt brake), which will limit the structural deficit (0.35% of GDP from 2016 onwards and no structural deficit after 2020). Similarly, a balanced budget amendment to the constitution has been approved in Slovenia and Spain. Several other countries, such as Austria and Italy are considering constitutional amendments to restrict fiscal policy. In the U.S., such amendments to the constitution have frequently been proposed, although none have yet been passed. The second question does not offer a method for measuring the structural deficit and so each panel member is asked to answer this question under the assumption that structural deficits are measured in a feasible manner, which they may outline if they wish.
What did the experts say?
Question 1: Lower debt to GDP ratio in normal times?
53% of the panel members agree or strongly agree that the government should target lower ratios and 42% disagree or strongly disagree. If the answers are weighted with confidence levels, then these outcomes are very similar. Those that are in favor seem a bit less explicit about the motivation, but the arguments that are given seem to focus on being prudent and having more room for responding when bad times hit. Those that (strongly) disagree point out that the debt to GDP ratio is only one particular indicator of fiscal policy and a crude measure. Moreover, it is pointed out that some countries can probably function well with high debt to GDP ratios. Moreover, it is pointed out that generally any target is likely to be different for different countries.
Question 2: Constitutional amendment?
The answers are even more equally split than for the first question. Those in favor emphasize the benefit of a sustainable long-term position and those against point out that there are times when the lack of flexibility can be very costly. It is possible that not all panel members interpreted the question the same. For example, some panel members pointed out that it is important to allow for high deficits during emergencies. The question was silent on whether the constitutional amendment would allow for this.
Several panel members (Ethan Ilzetzki , Helene Rey, Richard Portes, and Coen Teulings) suggest independent fiscal committees "with teeth" and a "larger role for expert opinion", that is, getting closer to how monetary policy is conducted. It would be interesting to see whether the panel members would be more united on the creation of such committees.