Introduction

In the aftermath of the global financial crisis (GFC), many countries engaged in fiscal and monetary stimuli to revive their economies. Most central banks sharply lowered policy interest rates, several of them to zero. Bank balance sheets were supported through guarantees and transfers, and deep tax cuts and public expenditure increases (fiscal stimulus packages) were put in place. As a consequence, the advanced economies’ fiscal deficits, which were 1.1% of their gross domestic product (GDP) before the crisis, went up to 8.8% in 2009 and dropped only marginally to 7.5% in 2010.1 The deficits were expected to decrease marginally to 6.7% of GDP in 2011 and 5.4% in 2012. In the case of emerging market economies, fiscal deficits and debt were low in 2007, but the fiscal deficits rose to 4.8% of GDP in 2009, dropped to 3.7% of GDP in 2010, and were expected to drop further to 2.6% in 2011 and 2.3% in 2012.2The GFC of 2008/09 had a particularly strong impact on the public finances of advanced economies, from whose financial sectors it had originally propagated. Massive financial sector bailouts and fiscal stimulus measures, combined with the work of automatic stabilizers, caused fiscal deficits and government debt ratios to expand (Figures 1.1 and 1.2). Although fiscal deficits have been narrowing since 2009, as stimulus measures faded and the global economy started recovering, International Monetary Fund (IMF) projections suggest that dealing with the consequences of large structural fiscal deficits and the buildup of public debt will dominate advanced economies’ fiscal policies well into the future.