This balancing act focuses on the quality of public expenditures and implies that deficits are justified only to the extent that they deliver sufficient returns in terms of future fiscal revenues (through public investment supporting total factor productivity, for instance, or through the countercyclical impact of automatic stabilisers).
On the financial front, redefining the social contract between generations means realigning today’s incentives so that tomorrow’s fiscal policy is not threatened by financial dominance. Bailing out banks with taxpayers’ money is indeed both unfair and a factor of moral hazard. A closer link therefore needs to be restored between the responsibility that arises out of excessive leverage and the costs associated with deleveraging.