In this article, Marina Primorac uses examples in history to deal with the current deficit problems countries are experiencing. She notes that countries like Japan, the United States and many European countries are experiencing deficit levels that have surpassed 100 percent of their respective GDPs. In this study, Primorac uses examples from the IMF database dating back to 1875 to examine the public debt levels in countries. This study examines six cases: the United Kingdom (1918), the United States (1946), Belgium (1983), Italy (1992), Canada (1995), and Japan (1997). In this study, Marina Primorac points out three lessons that the countries with high public debt ratios should utilize when they try to reduce their deficits.
Lesson 1: Fiscal consolidation must be complemented by policy measures that support growth.
Japan’s weak economic growth prevented effective fiscal consolidation. In Belgium, Canada, and Italy, the large fiscal adjustments implemented only effective reduced the debt levels when monetary conditions became supportive. The United Kingdom tried to devalue the pound. This led to increased unemployment, poor economic growth, and debt continued to rise. Although this internal devaluation showed high costs in the United Kingdom, there still needs more research to determine whether to rule out this strategy. The supportive monetary policy in the United States confirmed success in reducing the debt. The limits on the nominal interest rates and the bursts of inflation were helpful in quickly reducing the debt ratio.
Lesson 2: Debt reduction is larger and more lasting when fiscal measures are permanent.
Belgium, Canada, and Italy all implemented large fiscal adjustments, but their successes varied based on the length of the adjustment. Belgium and Canada experienced better results than Italy because their fiscal measures were permanent while Italy’s was meant to be temporary.
Lesson 3: Fiscal repair and debt reduction take time.
Only in post war years periods did country’s public debt reverse quickly. Taking the example of Belgium, it took ten years for the 7% deficit to move to a surplus of 4%.
Today, Japan, the United States, and European countries should look at this study with caution. Due to many variables, the effectiveness of fiscal measures to reduce their deficits could have varied results. However, these findings in this study does provide empirical evidence for how these countries should act.