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 2012.2
The 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.