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in 2008 – 2009. public finances are automatically weakened when gdp growth is low in developed countries as tax revenues then decrease and expenditure for transfers increases. some countries, such as the united states and ireland, also implemented extensive and costly government measures to support the financial sector. if countries with large deficits fail to manage their sovereign debt problems in a credible way there is a risk that they will find it difficult to borrow on the capital markets. they may then be forced to make faster and more extensive cuts than is economically desirable in the short term. however, the consolidation of public finances is necessary and may lay the foundations for better economic development in the longer term. normally, fiscal policy tightening leads to a slowdown in economic activity. in some cases tightening measures may actually stimulate activity if they lead the households to become more optimistic about the development of their net incomes. 6 however, this does not seem to be the case normally. according to an imf study, fiscal policy tightening ( in the form of a combination of reduced public expenditure and higher taxes ) equivalent to 1 per cent of gdp leads gdp to fall by 0. 5 per cent two years ahead, and unemployment to increase by 0. 3 percentage points. 7 the budget consolidation programme carried out in sweden in the 1990s could be regarded as an example of stimulating fiscal policy tightening as the swedish according to the theory of ricardian equivalence, or the theory of the stimulating effects of fiscal policy tightening, it is assumed that people understand that a budget deficit must sooner or later be funded by higher taxes or lower public expenditure. they are thus expected to react to increased budget deficits by increasing their own savings. this means that consumption will not increase as much and that an expansionary fiscal policy will have little or no effect ( see for example barro and redlick, 2011 ). imf, world economic outlook, october 2010. bis central bankers ’ speeches economy recovered relatively quickly following the crisis of the 1990s. however, michael bergman of copenhagen university has shown that budget consolidation in sweden between 1994 and 1997 actually had a negative impact on gdp and consumption and also led to an increase in unemployment. 8 given this it is reasonable to expect that cuts in the euro area and the united states will lead to reduced demand on export markets that are important to sweden, and to lower resource utilisation. risk of an impact on the exchange rate the fact that countries with weak public finances may be forced to implement fiscal tightening in what appears to be a weak economic climate has