Discussant: Daniel Carrigg (Lecturer, Department of Political Science)

Abstract:

In times of economic crisis, academics, policy makers, and pundits invoke the notion of ‘fiscal space’ when they ask how much government debt is too much. However, if fiscal policy is an important tool for responding to crises and inducing economic growth, then it is important to safeguard governments’ abilities to spend without worrying that increasing government debt will negatively affect future attempts to deploy it. This paper argues that though many popular assessment strategies of fiscal sustainability rely on ad hoc assessments of what amount of debt is desirable or allowable, governments often face constraints on fiscal expenditure in practice. These constraints may be legal — self-imposed or otherwise contingent —like balanced budget laws; financial, real, or perceived consequences in bond markets; and even potentially monetary if central banks accept or apply limits on sovereign bonds as collateral for funding operations. In an economy like the US, these constraints may appear at the state or municipal level; elsewhere, exorbitant privilege, size of GDP, and issuance of vehicle currency status together may influence the space an economy has to engage in deficit spending without incurring rising financing costs. Past experiences of financial crises and monetary constraints may induce future conservatism that is itself detrimental.