Solving the Fiscal Crisis Via Limiting Government Commitments

Ludger Schuknecht has a long track record in writing on public finance (in the mid-2000s, he was prominent in highlighting the windfall nature of revenues associated with real estate booms).  He is now with the German Ministry of Finance and this paper outlines one approach to solving the fiscal crisis.

9 replies on “Solving the Fiscal Crisis Via Limiting Government Commitments”

The conclusion reads

The policy recommendations from these findings are obvious: for the five ambitious reformers, the benefits of ambitious and comprehensive expenditure reforms are only going to materialise under one condition: that all these plans are fully and adequately implemented. The recommendation to the more timid reformers, including the United States, is also clear: reduce public expenditure ratios and undertake complementary structural reforms. A more fundamental debate on the role of the state in the future and on how to contain its commitments notably as regards public insurance is urgently needed.

Nowhere in any of this paper does the author even mention let alone discuss the option of increasing tax. He focuses entirely on expenditure reduction. And not be done ‘timidly’.

I have just googled the name. He works for the ECB. If I had known that I would not have bothered to read the paper.

“reduce public expenditure ratios and undertake complementary structural reforms”

I suppose people see what they want to see – or would like to see, but this article, once again, homes in on levels and ratios of public expenditure and all we get, as a cursory concession to reality and as some sort of throwaway, residual, balancing item, is the standard, ritualistic reference to the need for accompanying structural reforms. And, yes, it is probably beyond the scope of the paper, but it always seems to be beyond the scope of any paper on this issue.

There is a huge gap in the public discourse – both here and throughout the EU. A major re-think is required of the boundaries of the state, of the extent to which the private sector is dependent on public sector expenditure – either directly or via ‘tax expenditure’ (and how it might be weaned off these supports), and of what citizens can do, both individually and, more importantly, collectively, to reduce the increasing burdens on an excessively burdened and over-centralised state.

Economists – and politcial scientists – should be leading and framing this debate. But all we get, here and elsewhere, are these token, ritualistic references to ‘internal devaluation’, the need ‘to increase competitiveness’ and ‘structural reforms’. And the space is filled, in the main, with more and more detailed analysis and moithering about macroeconomic, fiscal and monetary policy issues when the main parameters and constraints have been set either internally or, more often, externally. And, of course, plenty noise about the iniquities of external parties – mainly as a means of avoiding consideration of the bleeding obvious.

This blog should be re-named “Half the Irish Economy” because it considers only the external physical features and there is almost a total unwillingness to examine the innards that actually determine these external physical features.

It’s pretty clear to me, but probably not to many others, why economists, both here and elsewhere, are reluctant to roll up their sleeves and engage with this ‘other half’ of the economy. It is a sad reflection on those who profess and practise this important discipline. We are all poorer (both intellectually and materially) – and will be poorer – as a result, but the relative position of those who profess and practise this discipline, in terms of reward, prestige and influence, will be unaffected – and may even be enhanced.

I suppose, at the end of the day, that is all that matters. Why should economists seek to advance the public interest when it might result in a sharp diminuition in their rewards, prestige and influence? And why, moreover, should they do so, when those who profess and practise other disciplines are furiously defending their relative positions in the pecking order without any regard for the broader public interest?

For politicians significant reductions to entitlement programs including PS wages and pensions are difficult to implement. With the level of debt and deficits in Ireland the gov’t has no choice but to reduce entitlements and raise taxes. The dreaded austerity programs that are bringing people out onto the streets in the PIIGS cannot be avoided. A rational, logical, reasoned, dispassionate paper, just what I expect from German economists.

Here is a link to a paper on the Stability and Growth Pact written by Ludger Schuknecht, Jurgen Stark (yes that JS) and others.


No offence intended to your goodself on my remark re author. And thank you for posting paper.
It is however amazing that ECB/Geman finance ministry officials seem to sing from the same psalm sheet and not a sweet note to be heard from either camp.

The second law of thermodynamics (an immutable law of nature) proves , absolutely, that all economic positive growth models are crocks: they’re mad, they’re bad and they’re dangerous. They cause death and injury to folk.

But, what is the probability that any irrational econ will publically acknowledge the above? (it would hardly get past a econ journal editor anyway). Zero and nil. Folk are very, very loss averse. Asking, nay demanding, that econs abandon dangerous models is akin to sliming their home (“its a heap of pyrite infected crap”) or landing a well aimed kick on their family pet. You will be a tad unpopular – and will not be invited for Afternoon Tea.

I recently questioned a religious canon of pol sci (political cleavages), using as an example the placement of an Irish political party on the L-R dimension, and was told in no uncertain terms that I was wrong (for asking a question!) – my comment lacked “intrastructural validity”. You will also be cheered by the great revelation (in another class) that 2Thermo does not apply to our espoused ‘growth’ model, “because it’s Capitalism”. I kid you not. 8)

So, there you go. A univeristy education may not be about learning after all, but is in fact an expensive clinic for the application of different forms of ‘Intellectual Aversion Therapy’.


@Paul H

Are you suggesting that Ireland’s economists are giving the impression they are about as useless as an equities analyst or management consultant who thinks all he has to do is work out some ratios, say they really ‘ought to be improved’, and tell his clients it would be a good idea if the businesses were ‘run’ more efficiently’?

Are you attempting to suggest that it “improvements could be made” is a bit of a cop out?

If so, do you think it is a deliberate and justifiable one?

@Phillip L

In the Irish context, are there actually useful definitions of ‘contract’ ‘obligations’ ‘expectations’ ‘entitlement’ ‘retrospective’ etc?

Doesn’t it rather too often come down to who is who, and what influence they carry?


I think you are aware I’m being a tad provocative. And, not surprisingly, I’m not provoking a response. The silence is far more eloquent and informative. And, at least, the case is being made on this ephemeral record.

It’s simple economics really. There is no point in the economists offering a supply of analysis on structural reform issues if there is no demand from those who should be considering these issues and deciding on them. And there is even less incentive to offer a supply when it might raise difficult politcial issues and attract a penalty. Being outspoken on these issues could be career-limiting and even livelihood threatening as one prominent economist recently discovered. This has a really chilling effect.

This ‘corporate sole’ nonsense covering Ministers and their Deaprtments prevents civil servants who deal with policy formulation and implementation engaging in the public domain. Even the few sentient beings among backbench TDs are constrained because all public utterances that might impact on policy deliberations have to be cleared with their party’s High Command to ensure it is consistent with the ‘party-line’. Most opinion-formers with a media platform lack understanding of the issues, or, in any event, know which side their bread is buttered on. And there is a continuous cacophony of the voices of those purporting to have some economic expertise doing the special pleading for the various producer, supplier, occupational and professional interests.

So I’m not surprised that most prominent economists are reluctant to raise their heads above the parapet – particularly when they could be blown off so easily. Once again, it is an opportunity and a requirement for collective action on the part of a number of economists, political scientists and opinion-formers; there is safety in numbers.

But the chances of this happening are negligible.

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