The IMF define – Fiscal Space – to be the :… room in a government´s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. The idea is that fiscal space must exist or be created if extra resources are to be made available for worthwhile government spending. A government can create fiscal space by raising taxes, securing outside grants, cutting lower priority expenditure, borrowing resources (from citizens or foreign lenders), or borrowing from the banking system (and thereby expanding the money supply). But it must do this without compromising macroeconomic stability and fiscal sustainability – making sure that it has the capacity in the short term and the longer term to finance its desired expenditure programs as well as to service its debt.It is always good to work with first principles as they will rarely lead you astray. They cut out all the humbug in the media, the statements by politicians and the ideological ravings of vested interests.
The above definition is not based on first principles but is an ideological statement. It assumes that the government in question has the same constraints that restricted governments during the gold standard when currencies were convertible and exchange rates were fixed....
On December 20, 2011, the credit rating agency Moody’s released a special report – Fiscal Space. This paper informs Moody’s – fiscal space tracker, which purports to present a “fundamentals-based measure of the risk of sovereign debt default”.
The analytical framework used by Moody’s comes directly from the 2010 IMF paper. The credit rating agency just mimics the approach outlined in that 2010 Staff Position Note.Bill contrasts this with MMT analysis of fiscal space in the existing floating rate monetary system in which governments are not obligated to exchange their currencies for anything other than themselves. In a fixed rate convertible system, government is contained by a real good that it must obtain. In a floating rate non-convertible system, this constraint is absent for government that issue their own currencies and do not incur obligations outside it, so their real constraint is availability of resources and their financial constraints are domestic price level and foreign exchange rate.
Policy-wise, understanding fiscal space is perhaps the most important aspect of MMT in that policy hangs on the effective and efficient use of fiscal space for achieving public purpose in accordance with democratic principles and processes. MMT analysis of fiscal space illumines the boundaries of policy space.
Bill Mitchell – billy blog
The ‘fiscal space’ charade – IMF becomes Moody’s advertising agency
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia
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