Governments as insurers against aggregate instability: the importance of government balance sheets The Bank has said before and we shall carry on saying that no set of measures introduced by national and international authorities – whether by way of regulation, resolution, or the structure of the financial system; whether leaning against the wind; or all in combination – is certain to prove sufficient to guarantee macroeconomic stability in the decades ahead. The final protection against economic collapse comes from governments – at the expense of their needing to take care about creating incentives for the private sector to take large risks. We have seen that amply demonstrated in this crisis. But, if society wishes, their role as catastrophe insurer can go beyond financial crises; governments can help smooth the adjustment of the economy in the face of any kind of disaster. They do so essentially by accumulating debt and so spreading the burden to future years, future generations. The extent to which they can do so depends on the starting position of their own balance sheets – in other words, their levels of debt relative to their tax-generating capacity, proxied by GDP, before crisis hit. And that means the strength of their balance sheets when a crisis erupts and also prospectively looking forward, so taking account of ageing populations etc. We are familiar with this from that part of our history when we regularly found ourselves at war. Spending, and so government debt to GDP, would balloon.
14  -30 2003  2004  2005  2006  2007  2008  2009  Sources: Bank of England and Dealogic. (a) Rolling three-month flows. (b) Estimated using data on syndicated lending flows. BIS Review 21/2010