What is a Fiscal Crisis?

Mary McMahon

A fiscal crisis is a situation where a government cannot finance its regular activities, including providing social services, paying for defense, and managing other government functions. There are a number of ways nations can attempt to address a fiscal crisis and they often involve hardship for many citizens. It is also possible for lesser units of governments, like states, provinces, and municipalities, to experience their own fiscal crises. These may occur as part of a larger economic problem or an independent issue.

Woman holding a book
Woman holding a book

Governments in a state of fiscal crisis cannot balance their budgets. They do not take in enough in tax revenues to cover their expenses and they cannot raise funds by floating government debt. The nation may already be servicing a large debt and can start to go into default. Usually, governments begin to slash as much funding as possible in an attempt to free up money for key functions, but this may not be enough to bring the government's spending back on an even keel.

As a fiscal crisis proceeds, it tends to develop a snowball effect. Each warning sign of financial problems contributes to increasing unrest and concern, making it harder to fix those problems. For example, a nation having trouble with its budget might issue government bonds to raise money, and find that investors do not want to purchase them because they are following the budget problems. The government may start issuing promissory notes instead of paychecks to employees, creating a ripple effect in the economy as government workers start to worry about meeting their own expenses.

In a deep fiscal crisis, a government may have to default or declare bankruptcy. In the case of regional governments like cities, bankruptcy and a chance to reorganize is a possibility. National governments do not have access to the bankruptcy court system and must instead choose to default on their debt or solicit international aid in the form of loans from organizations like the World Bank. Governments may also attempt to negotiate debt forgiveness if they are already carrying loans from such organizations.

During a fiscal crisis, politicians often use a variety of approaches to try and fix the problem, and they tend to be controversial. Raising tax revenues is necessary to balance the budget, but this may be difficult in periods of economic hardship when citizens and some legislators resist the idea of tax increases. Cutting funding to reduce expenses is also usually necessary, but deciding what to cut, and by how much, is a fraught task.

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Discussion Comments


@pleonasm - Some would argue that the fact that it's "not real" is the problem. I know there are still people who say that the solution would have been to keep to the "gold standard" which means to only issue money that can be backed up by actual gold owned by the government.

But it's an old argument and I don't know enough about economics or the global financial crisis to know if it would help in this case.

Supposedly, the yellow brick road in the Wizard of Oz was a metaphor for the gold standard, although I can't remember if the author was for it, or against it.


@Ana1234 - It's interesting the different kinds of solutions people try to come up with when it comes to financial crises. I've heard of people saying that the US debt problem could be solved if only they would mint a trillion dollar coin and use that to pay off the debts.

It kind of makes you wonder sometimes what reality actually is. Because we're all so invested in the money and banking systems, but when it comes right down to it, it's not real. Most of it is just numbers in a computer. Kind of makes me wish we could all just agree to put everyone's debt to zero and start over.


I actually read just the other day about how one country overcame their fiscal crisis. I think it was South Korea in the 90's when there was a big crisis all over Asia.

The government actually asked the people to donate any gold they had lying around (like jewelry and ornaments) to the government to help out. A lot of other governments (for example, their neighbor to the north) might have tried to force the people to give, but in this case, they just asked. And the people did give. They gave away hundreds of millions worth of gold.

It was mostly symbolic as the amount the government needed was so enormous that I think in the end they were bailed out by the World Bank. But, still, I think it speaks well of the country that people were willing to band together like that in an economic crisis.

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