Fiscal Consolidation

The International Monetary Fund has released a paper warning about the growth in sovereign debt.

The global economic crisis has resulted in the largest worsening of the fiscal accounts since the Second World War. In response to the crisis, government budgets have provided substantial support for aggregate demand and for the financial and other key sectors. In the process, fiscal balances have deteriorated, government liabilities expanded, and risks of future losses increased.

While this fiscal activism has cushioned the adverse effects of the crisis, it is now necessary to articulate a strategy to ensure the sustainability of the public finances. It is too early to exit from crisis-response policies: despite some evidence of improvement, prospects for the global economy remain uncertain. However, it is vital to ensure that markets remain confident that governments have a strategy to move their budgetary and balance sheet positions to a situation of normalcy. Failure to do so would destabilize expectations, raise borrowing costs, and weaken the effect of the fiscal and monetary support now being provided.

The IMF warns that governments will have to take action to improve their budgetary and balance sheet positions.

They are dreaming. It will not happen!!

During the last two decades, a number of governments reduced their spending and were able to push through tax cuts, but those days are over.

Over the next few decades, commitments to loan repayment and a growing interest burden will prevent governments from reducing their spending. Most governments will have to increase taxation, just to meet existing commitments.

The capacity for modern governments to increase taxation is huge. Americans think they are overtaxed already, but the increase in taxation has only started. Sustaining the Beast that is emerging will require a huge increase in taxation. Unfortunately, the American economy has the capacity to sustain that sort of increase. It will not be pretty, but we should not surprised, because this is what happens when the state becomes our god.