Global fiscal policy does not only look reckless—it is also utterly unsuited to today’s economic circumstances. Politicians’ failure to get the memo is mind-boggling
state of rich-world governments’ budgets would make even the luxury-loving Madame Bovary wince. America has avoided a debt-ceiling disaster, but in the year to May the federal government’s revenue fell short of its spending by $2.1trn, or 8.1% of. In the European Union politicians are finding that rising interest rates mean the debts financing much of the bloc’s €800bn in post-pandemic recovery spending threaten to drain the common budget.
Global fiscal policy does not only look reckless—it is also unsuited to today’s economic circumstances. High inflation and low unemployment mean the world needs tight policy, not loose. On June 14th the Federal Reserve held interest rates steady while it waited for more signals about the health of the economy. But with underlying inflation above 5%, few believe it will stand pat for long. As we published this leader, the European Central Bank was poised to raise interest rates again.
Politicians’ failure to get the memo is mind-boggling. America’s deficit has previously exceeded 6% only in periods of turmoil: during the second world war, after the global financial crisis and, most recently, following covid-19 lockdowns. Today no such disaster makes vast emergency spending necessary. Even the energy crisis in Europe that resulted from Russia’s invasion of Ukraine is in abeyance.
Higher interest rates make financial instability more likely. They also affect government budgets. For every one-percentage-point rise in rates, the British government’s debt-service costs rise by 0.5% ofwithin a year. One reason America faces a revenue shortfall is that the Fed’s profits, which flow into the Treasury’s coffers, have turned to losses as the central bank has had to pay more interest on the money it created to buy bonds during the stimulus years. These feedback effects matter.
Yet politicians’ efforts to change course have been paltry. Even after the “Fiscal Responsibility Act”, which lifted America’s debt ceiling and trimmed spending, net public debt is forecast to rise from 98% oftoday to 115% by 2033. The British government, having planned to tighten its belt last year, now reportedly hopes to cut taxes. The euro zone looks solid enough as a whole but many of its member states are fragile.
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