Introduction

The global economic and financial crisis has sparked an unprecedentedly large, generalized fiscal policy response in almost all major industrial and emerging economies. This will change the fiscal and macroeconomic landscapes for some time to come. In this paper, I present an overview of empirical evidence in order to provide a snapshot of such a landscape and provide for some reflection on the challenges that face policymakers as the global economy moves on from the immediate crisis-response phase toward what, at the time of writing, appears to be a policy driven recovery.

In what follows, I look at the following aspects: the size and composition of the fiscal stimulus packages of the major economies, the potential impact of these packages on aggregate demand and growth, the sustainability of fiscal positions, and the international implications of the new fiscal landscape. I then consider possible future scenarios and argue that it is unlikely that the global growth mechanism prevailing before the outbreak of the crisis will become viable again. Given the sizeable fiscal stimulus and its consequences for debt accumulation, and given that growth will not necessarily return to pre-crisis rates, there will be serious problems of fiscal sustainability in all major advanced economies. Policymakers will have to reconsider the framework within which fiscal policy is set, from three major viewpoints: fiscal institutions, the interaction between structural and macroeconomic policies, and international collaboration.

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