Fiscal policy is conducted at a sovereign level and will necessarily be shaped by national needs and priorities. This paper has outlined a set of principles for all economies to follow, but the execution must come at a national level. That said, there is an important need to coordinate policies across countries. International financial institutions must play a central role in this process.
Global growth is, arithmetically, an aggregation of country-level growth. Accordingly, to the extent that the principles set out in this paper stand to benefit national growth and prosperity, they should also benefit global growth and prosperity. Simply securing widespread agreement on the principles outlined here would represent a significant step forward.
However, there is a deeper need for coordination on some aspects of policy. An important element of this relates to plans for the withdrawal of fiscal support. If countries withdraw support prematurely, the world will face a shortfall of demand and the global recovery from the economic downturn associated with COVID-19 will falter – with obvious implications for incomes, livelihoods and inequality. Conversely, as mentioned earlier, if policy support is left in place for too long, there is a risk that inflation will become a global problem later in the decade – with equally significant implications.
There is a separate but related risk that policy support could be withdrawn in an uncoordinated or haphazard manner, such that trade imbalances become a concern. Countries that understimulate their economies must rely on demand from the rest of the world and will tend to run current-account surpluses. Likewise, countries that overstimulate their economies will tend to run current-account deficits. While there is nothing inherently wrong with running either a current-account surplus or deficit, large imbalances, left unchecked, can threaten macroeconomic and financial stability. There are already ominous signs that the recovery has become unbalanced, with surpluses in China, Taiwan and Vietnam rising and the US’s deficit widening. A key objective of policy coordination should be to narrow these global imbalances.
Coordination of policy at a global level is crucial to accelerating the recovery, and to preventing strategic rivalries and/or the spread of economic nationalism from threatening future prosperity.
More fundamentally, the global economy was already at a critical juncture before the pandemic. The twin props of technology and policy that had underpinned global integration following the end of the Cold War were starting to crumble. Globalization had peaked and was at risk of being rolled back. The US and China were ‘decoupling’ economically as political and trade tensions intruded on commercial relations. Joe Biden’s assumption of the US presidency in early 2021 means that the tone of the debate is likely to soften; indeed, the G7 finance ministers’ meeting on 12 February has already indicated that the US administration is likely to look more favourably on multilateral solutions to global problems. But the underlying structural issues will not go away.
The pandemic is likely to accelerate these trends, and there are several ways in which fiscal policy missteps could exacerbate geo-economic tensions. One would be if the recovery becomes unbalanced, with China’s current-account surplus becoming a growing drain on global demand. This would provide fodder for economic nationalists, who could promote a rise in trade protection and a return to the ‘beggar thy neighbour’ policies that followed previous crises such as the Great Depression. Another way in which fiscal policy errors could undermine constructive global economic relations would be if policy became driven by goals in other areas, such as technology or national security. Coordination of policy at a global level is thus crucial, both to accelerating the recovery and to preventing strategic rivalries and/or the spread of economic nationalism from threatening future prosperity.
