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Toward a New Fiscal Constitution

With the COVID-19 pandemic forcing governments to spend on an unprecedented scale to sustain businesses and households, there has never been a better time to restore the state to its proper role as a rudder for the broader economy. The market alone is simply no match for the challenges of the twenty-first century.

LONDON – The COVID-19 pandemic has had an immense, unpredictable, and lasting impact on economies around the world. As a result, governments have been given an opportunity – and an imperative – to rethink the role and purpose of fiscal policy.

A new approach is long overdue. Since the era of British Prime Minister Margaret Thatcher and US President Ronald Reagan, the prevailing economic orthodoxy has effectively denied the state’s potential investment function and made balancing the budget an end in itself. This indifference to both the direction and level of economic activity rendered the 2008-09 crash all but inevitable, and the subsequent rush to austerity weakened the recovery. Now, the simultaneous collapse of supply and demand following the arrival of COVID-19 has made neoliberal orthodoxy doubly untenable.

There is, however, little evidence that any new fiscal thinking is underway. Yes, emergency financing is being deployed. But unless this spending is structured, the post-2008 outcome will be repeated, with the liquidity driving up asset prices in financial markets but doing little to help the real economy.