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Mitigating Fiscal Risks from the Financial Sector

Author(s): Ludger Schuknecht

Date published: Aug 2019

SUERF Policy Note, Issue No 88
by Ludger Schuknecht, Deputy Secretary-General, OECD

JEL-codes: E62, G01, H63.
Keywords: Public debt, deficits, financial stability, fiscal financial linkages, sustainability, asset prices.

The debate on future risks for public finances so far mainly focusses on budgetary risks from population aging. In many advanced countries, these risks are in fact already materialising in rising social spending ratios, deficits and debt. There is, however, another very important fiscal risk dimension. This emanates from the financial sector. It has been present in developing and emerging economies for decades. However, it has also become visible and relevant in advanced countries with the global financial crisis. During the crisis, public deficits and debt ballooned as banks needed bailouts and real economies declined. However, there has been no systematic analysis through which channels financial developments affect public finances and which risks could materialise in the future. A first risk map and exploration of the transmission channels was developed in Schuknecht (2019). This policy note summarises the channels and elaborates on the policy implications.

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SUERF Policy Note, Issue No 88SUERF Policy Note, Issue No 88

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