the deterioration in public finances that we have seen during this crisis will keep gdp growth and inflation down in many regions for some time to come, as the weak finances will enforce fiscal policy contraction and / or may lead to higher interest rates. a tighter fiscal policy is inevitable to make public finances stable in the long term. restoring the deficit to the level that prevailed prior to the crisis, and one might ask whether this will be sufficient, is not simply a case of replacing the fiscal policy stimulus measures implemented during the crisis with corresponding tightening measures after the crisis. in addition, expenditures have to be replaced as potential gdp and thus potential tax revenue have fallen due to the crisis. the oecd estimates that potential gdp in the oecd area will decline by around 4 per cent as a result of the crisis. all in all, this means that public finances in the oecd area require a structural strengthening of around 5 – 6 per cent of gdp over the coming years. at the same time, several factors indicate that interest rates will rise, which will lead to increased interest expenditure and thus put even greater pressure on public finances. monetary policy is expected to become less expansionary in the years immediately ahead, which means that short - term interest rates will rise. the large general government deficits and thus rising borrowing requirements will probably lead to higher government bond rates. in addition, there is the premium that the market participants require as compensation for the risk that the debt may become unsustainable. meanwhile, stricter financial regulations will probably also lead to higher interest rates. in the past, there have been periods when the debts of the public sector as a percentage of gdp have been reduced as a result of high inflation. but as experiences of the harmful effects of inflation have led to more or less explicit inflation targets for central bank activities see reinhart and rogoff ( 2009 ). and as interest rates tend to adapt very quickly to inflation expectations, it is not probable that higher inflation will reduce public - sector debt as a percentage of gdp. our own experience from the swedish budget consolidation process of the 1990s shows that it is important for the credibility of fiscal policy not just to make general statements about what needs to be done to achieve a balance, but also to make concrete decisions on the spending cuts and / or tax increases that are considered necessary. experience also shows that it is important to base forecasts regarding improvements in public finances on cautious assumptions about economic growth. it may also be worth recalling that there is

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