IM-Sheikh_2024_0131.pub

Trying to balance the books in the face of a recession caused the Great Depression of the 30s. [...] It suffers from the same fate as a balanced-budget anchor at the first sight of a recession: The best thing one can do with it in such a situation is to put it aside. [...] It is even more problematic than a balanced budget post-recession: In the case of a balanced budget, one can at least have a notional objective of returning to a balance; what do you do with a debt-to-GDP ratio post-recession? Do you go back to the pre-recession ratio? Stabilize it at the higher post-recession level? Try for a downward trend in the ratio? If yes, to what level? Rather than waiting. [...] Put the two principles of fiscal policy together and you find that, over a business cycle, the net accumulation of public debt should be equal to the value of income-generating investments. [...] There are several operational issues that would need to be resolved before such an anchor could play a useful role in the conduct of fiscal policy, the most important being an assessment of the extent of income-generating potential of public investments that would be part of the anchor.