First, increased fiscal deficits could fuel market concerns regarding a country’s ability to repay its debt, thereby placing upward pressure on interest rates and leading to worsening financing conditions for everyone. We have already seen a number of euro area countries’ long-term government bond spreads widen substantially vis-à-vis Germany, which demonstrates financial markets’ ability to distinguish between countries on the basis of their creditworthiness.
Second, increases in budget deficits could raise concerns about an  2  Measured by the change in the general government deficit. BIS Review 81/2009  3  increased tax burden in the future, leading consumers to save rather than spend any additional income. This would also undermine the effectiveness of any further fiscal stimulus.