On Fiscal Austerity and National Debt: A Retrospective Approach to the Public Finances of Greece

Abstract

The growth considerations of fiscal policy reflecting budgetary imbalances, public debt evolution and methods of government finance, as well as the policy ensuing dynamic effects of the transition path toward equilibrium positions continue to be the dominant issues in international macroeconomics. Of paramount importance in both theoretical advances and empirical strategies is the crucial issue of fiscal austerity, and particularly its self-defeating attributes, as a means to correcting budget deficits while maintaining the sustainability of national debt, in conjunction to the worldwide impact of financial recession along with the procyclicality bias of the fiscal authorities, fraught with political-economy vagaries emerging in the process, which challenged many of the founding tenets of the traditional macrofinancial policy mix in smoothing aggregate demand and supporting a solid recovery trajectory with viable output growth rates and employment prospects. The core purpose of the present policy paper, reflecting upon the continuously traumatic Greek experience with persistently large imbalances in the general accounts of public finances, is to work as a notional bridge, by reconciling descriptive analyses with prescriptive methodologies, and as such produce a somewhat convenient basis for theoretical advances in the research field of appropriately defined fiscalist rules and effectively designed debt stabilisation policies. In accomplishing such a hybrid task, it adopts an over-simplistic arithmetic exercise underlying the stock-flow adjustment of pertinent policy variables and then, through a macro-financial approach to assessing the rate of interest impact and wealth effects of governmental sovereign finance, under conditions of both (im)perfect substitutability between domestic and foreign assets, for private capital accumulation and aggregate output productivity, it advances the relevant policy issues by recourse to a formal growth-modelling analysis of the equilibrium fundamentals aimed at addressing internalexternal imbalances, arising from varying budgetary constraints and accordingly adaptable debt stabilisation rules, hence ensuring the corresponding solvency constraint, and thereby underpinning the newer steady-state economy that helps enhance a rather modified index characterising the fiscal-growth nexus. Such a fiscal policy rationale on the output growth-debt dynamics interplay, although open to several alternative interpretations upon structural functional modifications, might prove both theoretically informative and technically consistent, perhaps optimistically, for conducting a conclusive policy design enriched with a robust flavour of practical applicability.