How to squash government debt

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The question of how to squash government debt is about as fresh as a pickled turnip. And given rising interest rates and feeble growth, the answers are about as sour. But a new working paper crunches through the extraordinary case of Jamaica, which halved its government debt-to-gross domestic product ratio from 144 per cent between 2012 and 2023. What could others learn from it?

The obvious answer is: not much. As American policymakers refuse to grapple with their fiscal position, they are not about to take advice from a hurricane-prone country with GDP per person of about $6,000, a population smaller than that of Wales, and exports dominated by tourism and aluminium oxide. Even other smaller countries with high debt loads will face their own special circumstances.

But squint and there are lessons to glean. One is simply that old fashioned belt-tightening is possible. Poorer countries tend to rely on a mixture of growth and inflation to squash their government debt-to-GDP ratios. But Jamaica did it through sustained primary surpluses (an excess of revenues over spending, excluding debt interest payments).

It is worth stressing just how extreme this was. In the 2010s, the Greeks howled about crushing conditions imposed by the Troika — the IMF, European Central Bank and European Commission — and eventually managed a primary surplus of about 4 per cent of GDP. After an IMF programme agreed in 2013, Jamaica’s exceeded 7 per cent of GDP for seven straight years.

Column chart of Contribution to change in debt to GDP during reduction episodes, percentage points showing Poorer countries tend to rely more heavily on growth and inflation to reduce their debt

How did they do it? Circumstances, perhaps. At its outset, Jamaica’s path looked highly unlikely. A reputation for fiscal mismanagement meant that in 2012 the government was desperate, cut off from international markets and facing the cold shoulder from the IMF. Peter Blair Henry of Stanford University and one of the study’s authors, gives some credit to strong leadership.

In an earlier study, Henry’s co-authors, Serkan Arslanalp of the IMF and Barry Eichengreen of the University of California, Berkeley, found hints of a more general lesson. Divided government seems to make primary surpluses less likely, presumably as it makes politicians more likely to bicker over who should bear the burden of spending cuts or tax rises.

In Jamaica’s case, the economists claim that a “hard-won tradition of consensus building” was key to “a sense of fair burden sharing”. Government creditors agreed to take a hit, while public sector workers accepted continued pay restraint. A group including financial sector and union representatives monitored reform efforts, scrambling the story that the IMF was policing harsh reforms from afar. Even a change of government did not throw things off course.

Line chart of Government revenue less spending excluding debt interest payments, per cent of GDP showing Jamaica’s primary surpluses in the 2010s were massive

The other supposed secret to Jamaica’s debt-crushing prowess was its fiscal rules. These were transparent enough to hold policymakers to account, but it was the inclusion of an escape clause in case of a disaster that made the rules credible. Actually sticking to them required consensus. The study’s authors suggest that neither would have worked without the other.

British politicians take note: in Jamaica, policymakers couldn’t get away with balancing the books by promising unspecified savings far into the future. And I do like to daydream about how different UK fiscal policy in the early 2010s might have been if its architects had not been quite so concerned about using it as a tool to screw over the opposition.

But here in the real world, transplanting these lessons elsewhere is challenging. The IMF is keen that others follow Jamaica’s example, but is finding that it can be hard to manufacture. Perhaps Jamaica is one of a tiny handful of exceptions that prove the rule, which is that this type of debt reduction is fiendishly hard.

Line chart of Unemployment rate, per cent showing Jamaica’s unemployment rate plunged at the same time as its government debt-to-GDP ratio fell

I would hope that a final lesson becomes a little clearer. Jamaica’s path may have been possible, but was it desirable? To be sure, it had no easy options. And more recently, there are signs that its efforts have been rewarded. Joydeep Mukherji of the credit rating agency S&P points out that the government has regained market access, which it is using to reprofile its debt. Last October it even issued an international bond in its own currency.

In the 2010s, unemployment fell. But although Jamaica’s growth became less volatile, it was also sluggish. Tight fiscal limits have suppressed infrastructure spending. “We don’t have a clear sense of whether a little less fiscal consolidation — if the additional funds had gone into things like education spending or health spending — might have been equally good or better,” says Eichengreen. Scope for more learning, then.

soumaya.keynes@ft.com

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