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Fiscal Stabilisation Plans and the Outlook for the World Economy

The topic of counter-cyclical fiscal policies has been put squarely under the spotlights since the outbreak of the current world-wide financial and economic crisis in September 2008. As governments have devised billion dollar stimulus packages, debates have raged in both the media and academia surrounding the effectiveness of such measures. This paper brings together material written on fiscal stabilisation plans in 2009 and a more recent macroeconomic projection for the world economy, which was made in early 2010. It attempts to provide an overview of the theory and empirical evidence on the effects of fiscal policies, placed in the current context of global recession and financial distress. It then goes on to address the question of where the world economy is headed given the now generally unsustainably high levels of public sector deficits and debt and given the possibility that the global financial crisis will have lasting adverse effects on potential output levels. This text is a very much abridged version of the full paper (80 pages in length) that was presented at the Bank of Italy’s Fiscal Policy Workshop, held in Perugia on 25 27 March 2010. The full paper can be obtained upon simple email request sent to the author.