Fiscal policy and public debt

Reis, Ricardo ORCID: 0000-0003-4844-9483 and Velasco, Andres ORCID: 0000-0003-0441-5062 (2025) Fiscal policy and public debt. In: Besley, Tim, Bucelli, Irene and Velasco, Andrés, (eds.) The London Consensus: Economic Principles for the 21st Century. LSE Press, London, UK, 197 - 217. ISBN 9781911712435

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Abstract

The original Washington Consensus fiscal policy principles involved fiscal discipline, public spending on physical and human capital, and broad tax bases with low tax rates. While these principles remain sound, in this paper we add two new principles supported by theory, evidence, and experience. The first new principle involves using targeted transfers to offset shocks that economic agents cannot insure against, and using transfers and public credit to preserve markets when a market-maker of last resort is needed. This policy will involve fluctuating public balances and infrequent but large public deficits during crises, which in turn requires a second principle to ensure the necessary fiscal space. That second principle is to preserve the special nature of public debt, keeping government bonds safe and liquid, via rigorous fiscal rules and credible fiscal and monetary institutions. For most countries, the existence of a global financial safety net is also essential to the successful implementation of this second principle.

Item Type:	Book Section
Additional Information:	© The Authors 2025
Divisions:	Economics School of Public Policy
Subjects:	H Social Sciences > HG Finance H Social Sciences > HJ Public Finance
Date Deposited:	21 Oct 2025 15:57
Last Modified:	21 Oct 2025 16:00
URI:	http://eprints.lse.ac.uk/id/eprint/129910

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