Consolidating the Covid Debt

One of the main functions of public debt is to smooth taxes and spending over time. In the Covid crisis, the Maastricht decit restrictions were temporarily suspended to allow for large temporary decits. As recovery sets in, countries are confronted with the task of consolidating the Covid debt. This paper explores a scal consolidation strategy combined with growth enhancing tax and expenditure reform. We quantitatively illustrate that this reform based strategy, by reaping
substantial eciency gains and inducing strong growth, eliminates the Covid debt, protects per capita social entitlements and yet avoids increasing tax rates. With slow consolidation, marginal tax rates are reduced right from the beginning.