What are the effects of the crisis on fiscal policy?
“Fiscal problems are a consequence of the crisis, caused mainly by the sharp decline in economic activity, which – as a result of shrinking tax bases and higher government spending – has led to a reduction in the tax revenue collected by governments.”
“Higher deficits lead almost immediately to the accumulation of debt. Debt ratios varied widely from one country to another at the outset of the crisis, but widespread government deficits have clearly led to a very significant increase in debt-to-GDP ratios in almost all advanced countries. The fundamental problem with this is that there comes a point when the debt can enter into an explosive dynamic, a dynamic that’s not sustainable.”
“It’s been necessary to adopt a contractionary fiscal policy to prevent excessive growth of debt that the markets may not have been able to absorb, or which would have triggered a dynamic that couldn’t be controlled. [...] Obviously this is exactly the opposite of what the textbooks recommend.”