Thursday, 2 September 2010

Welcome to fiscal space and good news for Australia

Fiscal space. It's the latest addition to my vocabulary from the wonderful world of international economics courtesy of the International Monetary Fund. Sometimes, says an IMF report out this week, "fiscal space" is used to refer to the scope for financing a country's deficit tout court or for financing the deficit without either a sharp increase in funding costs or undue crowding out of private investment. For this IMF analysis the authors have used what they call  "a simpler, starker definition—namely, fiscal space is the difference between the current level of public debt and the debt limit implied by the country’s historical record of fiscal adjustment."
By that measure Australia is doing quite nicely thank you whatever the would-be Treasurer Joe Hockey has been telling us in recent months. Australia clearly has one of the most manageable public debts in the world with the sobering evolution of public debt in advanced economies since the crisis, as well as IMF projections for debt ratios over the next five years shown in the following table:
Government Debt to Gross Domestic Product.

Among the advanced economies, Australia, Denmark, Korea, New Zealand, and Norway generally have the most fiscal space to deal with unexpected shocks—although of course they, too, must be mindful of future fiscal pressures cautions the IMF report. Greece, Italy, Japan, and Portugal appear to have the least fiscal space (i.e., least scope for increasing public debt without a fundamental shift in the behavior of the primary balance), with Iceland, Ireland, Spain, the United Kingdom, and the United States also constrained in their degree of fiscal maneuver, the more so owing to the run-up in public debt projected in coming years as well as demographic pressures and the possible realization of contingent liabilities.
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