The limits of austerity: The fiscal multiplier and the ‘debt Laffer curve’

Tsoukis

Abstract

We consider the maximum public debt-GDP ratio that is serviceable when one allows for the fiscal effects of the required primary surpluses (the ‘fiscal multiplier’). This simple but novel approach yields a debt Laffer Curve that defines the debt and deficit (as ratios over GDP) that may be feasibly sustained. We review estimates of the fiscal multiplier and argue that the maximum sustainable debt-GDP is likely less than 100% and the maximum feasible primary surplus is less than the 3.5% required by Greece’s creditors for the medium term; our analysis shows that insistence on such targets will be self-defeating. We also critically review structural reforms, a key pillar of the conditionality imposed on Greece. The policy corollary is that the paramount objective for both Greece and its creditors should be the return to high rates of growth, and currently this requires relaxation of austerity above all.

Citation

Tsoukis. (2017). The limits of austerity: The fiscal multiplier and the ‘debt Laffer curve’. In Political Economy Perspectives on the Greek Crisis: Debt, Austerity and Unemployment. https://doi.org/10.1007/978-3-319-63706-8_10

• Publication Date: Dec 17, 2017
• Book Title: Political Economy Perspectives on the Greek Crisis: Debt, Austerity and Unemployment
• Chapter Number: 9
• ISBN: 9783319637051
• DOI: https://doi.org/10.1007/978-3-319-63706-8_10
• Keywords: Greek crisis, Eurozone, debt, bailout, austerity, political economy
• Publisher URL: http://www.palgrave.com/gb/book/9783319637051