Martin Wolf in his Financial Times column last week, has given an interesting analysis of the arguments for and against fiscal tightening. He notes that policymakers are shifting their views on the subject, mainly due to an improved forecast for recovery, and the European response to the Greek fiscal crisis.

Fiscal tightening, along with the overall idea of deficit spending, are subjects that INET is very interested in. We believe that these issues will become more important, as we see how the current fiscal crisis evolves.

In his column, Wolf deftly lists the arguments for and against fiscal tightening, grouping advocates into broad categories of “cutters” and “postponers.”

According to Wolf:

“The ‘cutters’ argue that huge fiscal deficits – never seen in peacetime in big developed countries, notably the US – threaten long-term fiscal credibility and depress private confidence and spending. While piling fiscal stimulus on top of the built-in stabilisers made sense in the panic of 2008 and early 2009, the time has come for swift consolidation. Otherwise, a spike in borrowing costs looms, with dire results. The permanent loss of output and revenue left behind by the crisis, along with ageing populations, make action inescapable and urgent.”

And on the other side of the fiscal tightening fence…

"The 'postponers' agree there must be decisive slowing of the growth of long-term spending. But they emphasise the fragility of recovery and, in particular, the huge private sector financial surpluses. This private frugality has caused the fiscal deficits, they insist, not the other way round. The sequence of events makes that evident.”

In other words, the "postponers" believe that governments should continue fiscal stimulus plans, at least until there are clear, decisve signs that indicate that enough is enough.

There’s much more analysis on Wolf’s FT column.

INET is open to opinions not only from the “cutters” and the “postponers,” but indeed from anybody who might have an informed opinion about the future of deficit spending and fiscal tightening. We aim to stimulate conversation, from which ultimately we’d like a new paradigm of economic thought to emerge.

At our inaugural conference at King’s College earlier this year, we invited some notable economists and asked their opinion about deficit spending. In the following video, John Cassidy, Ken Rogoff and Richard Koo give their opinions on deficits and how they relate to financial stability:

To see more video of our conference at King's College, please go here.

For more about fiscal tightening and deficit spending, please see "The Deficit Debate," part of our new question series that aims to inspire new thinking in the field of economics.

Peter Leyden

Director, INET Online