Decomposition of Fiscal Deterioration in the OECD

Abstract

Government fiscal positions in all the advanced economies suffered severe deteriorations during the financial crisis. Figure 1 illustrates the cumulative deterioration of the government budget ratio as a per cent of GDP between 2007 and 2009 in a selection of OECD economies. The sharpest declines materialised in Ireland, Spain and Finland, while public finances in Austria, Germany and Italy have held up better. Budget deficits have worsened in part because of the cyclical downturn, in part because of the policy response to the crisis, including both fiscal stimulus packages and certain fiscal costs related to government support of financial institutions, and in part because of a change in the relationship between revenue and production, which may prove longer-term.