Revisiting Fiscal Responsibility Norms : A Cross Country Analysis of the Impact of COVID-19

In this paper, we have reviewed the COVID induced shock to the debt and deficit profiles of 10 of the largest economies by size of GDP in 2019 referred to in this paper as the Big-10 economies. There is a sharp upsurge in their government debt-GDP ratios because their policy responses to the COVID induced recession have been large fiscal stimuli based on borrowing. With low and often negative growth rates and high fiscal deficit, the debt-GDP ratios are projected to rise sharply in these economies. As normalcy is restored, these countries may attempt to sharply reduce their borrowing levels relative to GDP. However, we argue that before this is done, individual countries may do well to reassess their sustainability norms whether cast in terms of agreements such as the Maastricht Treaty or country level Fiscal Responsibility Legislations (FRLs) or other similar norms. This revision is called for because of the longer-term trends in these economies of rising money supply, falling nominal interest rates and nominal growth rate. The contribution of this article lies in highlighting that the existing FRL norms have become dated in the European and other similar economies because of significant changes in macro parameters such as the interest rate, the long-term growth rate and the government debt-GDP profiles of these countries as compared to the time when these norms were originally determined. There is thus a need now to re-determine these norms which may be higher than their current levels. Even though, some recent literature suggests that the sustainability benchmarks may have shifted upwards, we argue that the post COVID debt-GDP ratios have exceeded these revised benchmarks by significant margins in the case of a number of the Big-10 economies