DP9476 Fiscal consolidation: austerity and alternatives
We study the path of the debt/output ratio during Fiscal Consolidation first when there is no demand failure and output matches exogenously growing supply throughout; then, in a time of recession, when expenditure cuts reduce demand so growth slows and debt/output ratios rise further and faster. As the correlation between slow growth and high debt arises from demand weakness, faster consolidation would prove counter-productive, ceteris paribus. Better, according to DeLong and Summers, that fiscal consolidation efforts
be state contingent | allowing room for economic stabilisation; or, as Shiller has argued, that debt itself be state contingent, being indexed to GDP.