Large Primary Budget Surpluses

The ECB’s June monthly bulletin has an interesting box on pages 94-95 on “Past Experiences with Sustaining Large Primary Budget Surpluses” (defined as sustained episodes with cyclically-adjusted primary budget surpluses of at least 4.5 percent of GDP for 5 years or more).  The bulletin is here.

4 replies on “Large Primary Budget Surpluses”

Posted this on another thread which perhaps was not relevant for the topic but feel this is a important angle on the current problem.
The ECB is either retarded or bad to the bone – most days I think they are the latter.
Without substantial goverment defecits the entire economy becomes destablished over time as the private sector enters extreme debt levels.
If the ECB truely belived it own horse manure on Goverment defecits it would be buying Gold on a massive scale to reduce the debt levels withen the eurozone.
Its a intellectually dishonest organisation at best.

Ireland’s performance from the nineties onwards looks great. But public sector deleveraging coincided then with private sector leveraging. (That’s the key datapoint missing from that box.)

The problem we face today is that we want the public sector to deleverage at the same time as we are already experiencing heavy private sector deleveraging. Both are simultaneously possible only with utterly heroic export performance. That is unlikely with spluttering growth prospects in our key export markets.


There are a couple of extraordinarily convenient things about that box.

First, Ireland gets the time-line back to 1988, but basically all these took place during roughly the mid 1990s to roughly just after 2000. There was a strong tail wind during this time. What are the implications for the current scenario?

Second, they note:

“The reduction in debt ratios was supported by declining interest
rate/growth rate differentials.”

The authors evidently were not trading treasuries or gilts much over the last thirty years as they fail to ascribe this to the general, worldwide decline in realised and expected inflation that floated most bond (and other) markets from the high inflation eighties through to the naughties as eastern Europe and China stamped on it. Instead in characteristic ECB style navel gazing they offer this:

” Here, the beneficial effect of sound fiscal policy on reducing (market) interest rates and supporting sound and sustainable output growth played an important role.”

They would have the reader believe that it was fiscal rectitude in Belgium etc rather than more obvoius influences that shifted bond yields downwards – and of course, will do so again!

There were 2 interesting insights in last Sunday’s NZZ am Sonntag, the Swiss paper. The NZZ is worth a read because it has no interest in the Irish situation and so can say what it likes.

The first point concerned growth. The primary goal of the PIG bailouts was to give investors their money back. As growth was not the focus growth is far less likely.

The second point concerned Greece and its default. The strategy seems to be to kick the Greeks down the road for the next 2 years and give Italy and Spain enough time to get their act together. By the time Greece defaults the damage should in theory be limited. In this scenario Ireland would presumably default shortly afterwards. Of course 2 years hence the sick banks of France and Germany will most likely still be in the quagmire but it was interesting to read where the PIG bailout club fit in the big picture. I presume the decision makers have given up on Ireland.

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