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Defusing the fiscal time-bomb

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Standard Life Investments, the global investment manager, is warning that the public finances of developed countries are still vulnerable to an economic shock unless more is done to boost growth and reduce debt. 

In the latest edition of Global Perspective, research by Standard Life Investments shows that sovereign debt in the developed economies of the OECD* has ballooned since the financial crisis and that a renewed recession would push debt to even more worrying levels. Governments and central banks should act now to reduce their fiscal imbalances. 

Countries can help improve their debt outlooks by pursuing growth friendly policies alongside prudent, long-term credible fiscal planning. The best policy response should include a combination of monetary stimulus, investment in infrastructure and deep structural reform. Without these measures, countries may resort to more painful and damaging economic policies to deal with high public debt burdens. 

Jeremy Lawson, Chief Economist, Standard Life Investments, says: “The financial crisis has left a deep scar on public sector balance sheets across the developed world. Increases in debt, lower nominal growth rates and weakened budget positions have made governments vulnerable to another economic shock. What can be done to make public finances more robust and reduce debt positions?

“Our simple debt equation helps to provide some answers and shows that improving the nominal growth outlook provides the best policy option. Some economies, particularly those in the Eurozone, require further monetary stimulus alongside a temporary, targeted loosening of fiscal policy. 

“More generally, countries should look to boost long-term growth rates by accelerating structural reforms aimed at boosting productivity. Public infrastructure investment is another avenue to promote growth, with the added attraction of being fiscally neutral if done effectively. Longer-term consolidation plans must also be enhanced.” 

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