Is fiscal policy economically safe? As I write this the EU Council are in the 4th day of a marathon meeting trying to agree the €750 billion rescue plan for Covid-19 and the next 7-year funding round. At its heart the debate is around the safe use of fiscal policy so I did this video to try and explain the issues and an outline for the safe use of fiscal policy.
So, how can we use fiscal policy safely to assist our economies during the management and recovery from the Covid19 pandemic? At the heart of this debate is the use of fiscal policy when most economies are already running large deficits. However, there are a few key points to understand when considering the safe use of fiscal policy.
However, there are a few key points to understand when considering the safe use of fiscal policy.
- This time IS different. The economic shutdown was mandated by public health policy. There was no other reasonable policy response. The cost of not spending would have been a complete seizure of society, not just the economy.
- Not all fiscal spending is the same. Difference between Recurring spending, One-off expenditure and capital investment. Funded through Recurring taxes, One off or windfall taxes and borrowing.
- Emergency one off spending is not expansionary fiscal policy per se. It increases the national debt but does not increase the size of the recurring public sector.
- Using the current emergency fiscal spending, funded by borrowing, to expand the core public sector is a bad idea.
- This expenditure will mainly by funded through longer term government bonds.
- So, in summary, the safe way to use fiscal policy is to focus on one off expenditure to stimulate the economy in this emergency and be careful not to increase recurring expenditures using the current emergency funding.
Enjoy the Video!
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