Finance Minister Jim Flaherty, left, and Prime Minister Stephen Harper signal thumbs up in the foyer of the House of Commons prior to Flaherty delivering the budget on Parliament Hill on March 4, 2010.Pawel Dwulit/The Canadian Press
Not sure it's a great idea for International Monetary Fund officials to pose as God, given that institution's fraught history. Then again, if that holier-than-thou tone is directed at the world's richer countries, then who cares?
Olivier Blanchard, the IMF's chief economist, and Carlo Cottarelli, the director of the fiscal affairs department, published an article on the fund's blog Thursday afternoon called
The timing is obvious. The speed at which Europe, and to a lesser extent the United States and Japan, shrink their budget deficits has emerged as the most important debate at this weekend's Group of 20 Summit.
Messrs Blanchard's and Cottarelli's code of conduct doesn't have the same poetic ring as the original. "You shall not make yourself an idol" packs a more punch than "You shall have a credible medium-term fiscal plan with a visible anchor (in terms of either an average pace of adjustment, or of a fiscal target to be achieved within four-five years)."
Still, Prime Minister Stephen Harper and Finance Minister Jim Flaherty may want to pass that one around as they begin negotiations Friday, since, as Mr. Flaherty conceded yesterday, the G20 hasn't yet embraced their idea of group wide deficit targets.
There are other commandments that could make Messrs. Harper and Flarhety squirm, such as the IMF economists' call that "promising 'no new taxes,' in all countries and all circumstances, is unrealistic." This is an echo of former Bank of Canada Governor David Dodge and others who have questioned this year whether the Conservative government can really close its deficit without raising the Goods and Services Tax.
But there's one commandment that all G20 members should take to heart: "You shall implement wide reforms to boost potential growth."
Growth. It's the point of the austerity v. stimulus debate that's been raging all week. But ask yourself something: in the midst of that frenzy, have you heard many policy makers talk about what they plan to do create economic growth? Messrs. Blanchard and Cottarelli explain why it's time to widen the discussion beyond cutting deficits and short-term spending initiatives:
Strong growth has a staggering effect on public debt: a one percentage point increase in potential growth - assuming a tax ratio of 40 percent - lowers the debt ratio by 10 percentage points within 5 years and by 30 percentage points within 10 years, if the resulting higher revenues are saved. An acceleration of labor, product and financial market reforms will thus be critical.
In the current context of weak aggregate demand, reforms that increase investment are more desirable than reforms that increase saving. While both have positive long-run effects, investment friendly reforms increase demand and output in the short run, while saving friendly reforms do the opposite. A word of caution, though: the timing and magnitude of the effects of structural reforms on growth are uncertain: fiscal adjustment plans relying on faster growth would not be credible.