2 signals to economic agents about government priorities and allowing governments to better leverage the development process. Poorly designed and executed, the budget may become a dangerous source of financial and institutional instability.

# **_Unparalleled fiscal deterioration_**

One particularly worrying feature of fiscal policies during the past 35 years is that deficits and rising public debts have been a permanent feature of the policy landscape. Whether we focus on the rich industrial countries or countries in the developing world, budget balances have been negative in every single year during the past 35 years, with an average deficit in excess of 3 percent of GDP for both groups of countries.<sup>3</sup> Countries may run fiscal deficits for a variety of reasons. An economic recession may weaken revenues and push up certain types of expenditures (e.g., unemployment compensation), especially if governments use deficit spending as a way of stimulating the economy through fiscal multiplier effects.<sup>4</sup> The prices of key export commodities in international markets may fall and this may undermine trade-related revenues. In some countries natural disasters may put pressures on budgets, as governments try to respond to emergency needs. However, as noted by Kumar and Ter-Minassian (2007), the persistence over time of deficits and the corresponding unyielding rise in public indebtedness suggest that other factors could be at work, that go beyond those identified above and that more fundamentally may reflect certain institutional weaknesses that undermine fiscal discipline and responsible management of public resources.

Perhaps nothing has underscored more the fundamental importance of the budget and the sustainability of the public finances for economic growth than the aftermath of the 20082009 global financial crisis and the dramatic deterioration of the fiscal accounts that has accompanied it. Indeed, it is clear that the most distinctive and worrisome feature of the current global economic situation is the huge increase in public indebtedness by the industrial countries that the crisis has brought about. In this paper this dramatic fiscal deterioration will be used as the starting point for a more detailed analysis of the various issues underlying the budget and the apparent inability of governments everywhere to show greater fiscal discipline. In particular, it will be argued that shortcomings in fiscal management pose a serious threat to the global economy at a time when, for a variety of reasons, budgets are likely to come under increasing pressure in coming years.

According to the IMF’s October _World Economic Outlook_ (2010, p. 18) in the major advanced economies the average fiscal deficit jumped from 2 percent of GDP in 2007 to some 9 percent of GDP in 2009, greater than any deficit seen since the end of World War II. In some countries like the United States, Japan, the United Kingdom, Greece and Spain the deficit widened to levels in excess of 10 percent of GDP. In the latest (2013) IMF medium term forecasts public debt in the advanced economies rises from some 73

> 3 This interesting statistic is provided by Kumar and Ter-Minassian (2007) and refers to the period 19752006.  We can extrapolate it to 2013, confident in the assumption that the fiscal data for the past 6 years will only have worsened the average size of the deficit.

> 4 After the crisis, there has been renewed interest in the scholarly literature in trying to measure the multiplier effect of deficit-financed government expenditure. A recent review by Valerie Ramey (2011) concludes that the multiplier is likely between 0.8 and 1.5.