Global Fiscal Policy

Background:

Research by Carmen Reinhart and Kenneth Rogoff shows that the average rise in real public debt in the three years following the past 13 major financial crises was 86%. In some cases, the increase was more than 150%. Besides fiscal stimulus spending and weak revenues, government finances have taken a hit from extending fiscal support to the financial sector. As of May 2009, according to the IMF, government support to the financial sector (including guarantees) in advanced economies was 50.4% of GDP, with upfront financing at 5.8%. Notable cases were the U.S. (with a total of 81% and a total upfront of 7.5%), the UK (81.6% and 18.9%), Sweden (69.7% and 5.2%) and Ireland (267% and 5.4%). In the past, emerging markets were ridden with debt and developed countries managed to reduce their large debt burden. Going forward, developed economies will be in a worse fiscal situation than emerging markets due to several reasons—primary deficits will be higher, aging populations will keep welfare spending  elevated, slower economic recovery will keep revenues sluggish and high yields will raise interest payments on debt.