to our problems but rather important initial steps towards a more balanced development. for one thing, the positive trend in the swedish economy does not yet apply at all substantially to the labour market. a downward adjustment in the rate of wage increases towards more reasonable long - term figures has begun but we do not know how permanent it will be. what will happen in the next round of wage negotiations if capacity utilisation at that time is high? is the functioning of the - 6labour market in other respects sufficiently smooth for the adequate creation and filling of new job vacancies? this is a key question. if we do not succeed in finding good solutions in sweden when it comes to wage formation and the workings of the labour market, in the longer run it will not be possible to permit such strong economic expansion as we have experienced in recent years. another aspect of economic policy that, like the functioning of the labour market, is closely connected with the riksbank ’ s domain is fiscal policy. in recent years monetary policy has been assisted in the first place in that the consolidation of government finances has restored a stable foundation for economic policy ; in addition, there has been the more direct restraint — in a cyclical perspective — on demand and price impulses. in recent decades that was by no means invariably the case. on the contrary, there were periods when fiscal policy accentuated the cyclical movements. i find it important to issue a warning about repeating mistakes of this type. in the middle of an economic upswing we are now hearing calls for expansionary fiscal policies in the form of increased public spending as well as unfinanced tax cuts. there are strong long - term grounds for using the upswing in activity to build up government surpluses as a buffer for harder times. that will increase our future freedom of action in economic policy. it will be easier to cope both with future economic downturns and with structural challenges such as an ageing population. a tighter fiscal policy also eases the burden on monetary policy and increases the probability in the years ahead of being able to continue to have low interest rates and a stable economic development, with good growth of production and employment.

it is likely to persist and what policy should seek to do about it. but before turning to those topics, let me say a few words about the headwinds that still confront us on the demand side of the economy. to begin with, this was not a typical downturn and we should not anticipate a typical recovery. after normal cyclical downturns, economies typically return to the previous trend growth path within a few years. but after financial crises, economies often take much longer to recover. indeed, the evidence suggests that output typically stays well below a continuation of the previous growth path for many years thereafter. for instance, a study by the imf 2 found that across 88 past crises, output per head was, on average about 10 % below such a path fully seven years after the onset of the crisis, though there is considerable heterogeneity in the experience of individual countries ( chart 1 ). unless crises are also associated with an equivalent impairment of supply capacity, that implies an increase in the margin of unused resources. http : / / www. bankofengland. co. uk / publications / speeches / 2008 / speech342. pdf imf world economic outlook, october 2009. bis central bankers ’ speeches the primary reason for such a slow recovery is that the unwinding of earlier financial excesses takes time. moreover, banking crises are also frequently associated with a subsequent deterioration of the public finances, as governments provide support to vulnerable financial institutions and tax revenues drop back. both these features are, of course, present today in many of the advanced economies, including in the united kingdom. uk banks have made considerable progress over the past year in improving their balance sheet positions, but funding costs remain elevated and over the next two years they face the challenge of replacing around £400 billion of maturing wholesale funding. credit availability to larger corporates has improved significantly, but small and medium - sized enterprises still face difficulties in securing affordable credit. as a result, conditions in the banking sector are likely to continue to act as a brake on the recovery. as far as the public finances go, the public deficit widened sharply in the wake of the recession, reaching more than 11 % of gdp in 2009 / 10, in large part reflecting the endogenous response of spending and revenues to the downturn in activity. action would be needed to address such an unsustainable deficit, unless an early resumption of the pre - crisis growth path is expected. as