Trying to return to high growth rates may lead to behaviour that could again prove unsustainable and lead to new excessive fluctuations. Financial markets are assessing the policies implemented in different countries also on the basis of countries’ ability to meet their commitments over time, particularly as regards debt repayment. This has an impact on the effectiveness of fiscal policy.
As long as agents have confidence in a state’s ability to repay its debts, owing to higher future tax revenues, fiscal policies can stimulate aggregate demand and offset the decline in private consumption and investment caused by the economic slowdown.