As countries come out of the economic and financial crisis with a sharp deterioration in their public finances, they need a fiscal recovery plan to reduce debt burdens before long-term pressures hit with full force.
The OECD has found a number of lessons taken from country experiences that may be useful as each country grapples with its own – often unsustainable – fiscal position.
Read ‘Restoring Fiscal Sustainability: Lessons for the Public Sector’ on line (PDF, 1.3MB)
A multi-year deficit reduction programme allows citizens and creditors to adjust gradually and provides a disciplinary framework to achieve more sensible government finances. Although it should not be implemented until the economy is on stronger footing and public confidence in financial markets has been restored, agreement on, and announcement of, a credible deficit reduction plan can help encourage the recovery by reducing the fears of inflation or currency instability.
In the absence of a plan, creditors will eventually begin to demand an increasing risk premium for holding government debt, which could slow or even choke off the recovery. If the fiscal position continues to deteriorate, at some point the risk premium will be insufficient to induce creditors to invest in government instruments.
This point could occur if inflation accelerates, fear of default rises, or financial instruments elsewhere look more appealing, leading investors to shift their funds to safer countries.
It is not too early to plan for the future. In fact, it is critical that countries get started now.
OECD can help the G20 monitor fiscal consolidation plans and can assist countries in formulating and implementing such plans. In the public governance area, two OECD activities are of particular relevance.
For further information on the OECD's work in this area see www.oecd.org/gov/budget