Public debt in advanced economies has climbed to its highest level since World War II. In Japan, the United States, and several European countries, it now exceeds 100 percent of GDP. Low growth, persistent budget deficits, and high future and contingent liabilities stemming from population-aging-related spending pressure and weak financial sectors have markedly heightened concerns about the sustainability of public finances. These concerns have been reflected in ratings downgrades and higher sovereign borrowing costs, especially for some European countries. Correcting fiscal imbalances and reducing public debt have therefore become high priorities.
World Economic and Financial Surveys
World Economic Outlook (WEO)
October 2012
Coping with High Debt and Sluggish Growth
by International Monetary Fund
http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/text.pdf
Chapter 3. The Good, the Bad, and the Ugly: 100 Years of Dealing with Public Debt Overhangs
The Good, the Bad, and the Ugly: 100 Years of Dealing with Public Debt Overhangs
Throughout the past century, numerous advanced economies have faced public debt burdens as high, or higher, than those prevailing today. They responded with a wide variety of policy approaches. We analyze these experiences to draw lessons for today and reach three main conclusions. First, successful debt reduction requires fiscal consolidation and a policy mix that supports growth. Key elements of this policy mix are measures that address structural weaknesses in the economy and supportive monetary policy. Second, fiscal consolidation must emphasize persistent, structural reforms to public finances over temporary or short-lived fiscal measures. In this respect, fiscal institutions can help lock in any gains. Third, reducing public debt takes time, especially in the context of a weak external environment.