Media Briefings

‘Fiscal Feedback’ On High Public Debt: A Simple Rule For The Speed of Spending Cuts

  • Published Date: March 2012

When the ratio of government debt to GDP has increased significantly and needs to be reduced, society as a whole will be best off if public spending is cut by about £5 per year for every £100 of excess debt. That is the simple rule for socially optimal ‘fiscal feedback’ on debt suggested in new research by Professors Tatiana Kirsanova and Simon Wren-Lewis.

Their study, published in the March 2012 issue of the Economic Journal, comes at a time when governments around the world face tough decisions about how much taxes should rise or public spending fall to curtail and possibly reverse the increase in debt brought on by the financial crisis and the recession of 2008/9.

The results indicate that there is a critical minimum level of ‘fiscal feedback’ or speed of correction for debt, which avoids the threat of debt not being stabilised. But this critical minimum level is quite small and the optimal level of feedback is not far above it. In other words, debt correction should be very slow – and it does not seem to matter whether taxes or spending are used to control debt.

Suppose some macroeconomic shock leads to a large increase in government debt relative to GDP, the researchers begin. Their study looks at the case where there is no problem financing this deficit, so the government has a great deal of freedom in how quickly it brings debt under control.

Suppose the government has a simple rule, which either cuts spending or raises taxes in some proportion to the level of excess debt. This research looks at the implications for welfare of different coefficients on this rule, implying different speeds of correction for debt.

The researchers call this the degree of ‘fiscal feedback’. They assume throughout that monetary policy sets the optimal level of interest rates from a social welfare perspective.

Their first result, which mirrors earlier analysis based on simple rules for monetary policy, is that there is a critical minimum level of fiscal feedback required. If feedback falls below this level, there is a danger that debt will not be stabilised, and monetary policy will be diverted from its task of controlling inflation in an effort to avoid explosive debt.

There are then two possibilities. The first, which occurs if there is no fiscal feedback at all (the response of spending and taxes to excess debt is zero), is that monetary policy succeeds in stabilising debt. The second is that the debt to GDP ratio very gradually explodes. In either case, the outcome for social welfare is worse than if feedback had been above this critical value.

This critical minimum level of feedback is quite small. The second result is that the optimal level of feedback is very close to this critical minimum level. Very roughly, social welfare is maximised if government spending is cut by about £5 per year for every £100 of excess debt. As the speed of debt correction increases, social welfare steadily deteriorates, although never by as much as when feedback is below the critical value.

This result – that debt correction should be very slow – appears to be robust to whether taxes or spending are used to control debt, and has been found by other authors in different contexts.

The intuition behind this result is partly that of ‘tax smoothing’: large movement in taxes and spending are disruptive. In addition, if fiscal feedback is too large, it can – through its implications for aggregate demand – complicate the task of monetary policy stabilisation.

One final result is that this simple rule for fiscal feedback, when the best coefficient is chosen, works almost as well as a more complex optimal rule.


Notes for editors: ‘Optimal Fiscal Feedback on Debt in an Economy with Nominal Rigidities’ by Tatiana Kirsanova and Simon Wren-Lewis is published in the March 2012 issue of the Economic Journal.

Tatiana Kirsanova is at the University of Glasgow. Simon Wren-Lewis, an economics professor at the University of Oxford, blogs at:

For further information: contact Simon Wren-Lewis via (email:; or Romesh Vaitilingam on +44-7768-661095 (email: