This article is part of an FT series on the economic cures for the coronavirus crisis, in which leading commentators and policymakers give their advice on how to alleviate a devastating global slowdown.
As the enormity of Covid-19’s probable economic fallout dawns, governments should prepare themselves for equally yawning gaps in public finances. That should not be a cause for alarm. On the contrary, unless government deficits widen to a scale unprecedented even in the global financial crisis then policy may well be seen to have failed to do its job.
Between 2008 and 2010 the public debt of the Group of 7 large economies rose by 10 to 25 percentage points as a share of gross domestic product. Government deficits worsened by four to 10 percentage points. Most of that was because of the collapse in GDP, which reduced tax revenues and increased spending on things such as unemployment benefits — the “automatic stabilisers” of government budgets in action. A smaller part was due to the discretionary fiscal stimulus packages deployed in 2009.