When Greece accepted the first of several bailouts in May 2010, creditors — among them the IMF — forced Athens to take an axe to public spending in exchange for the funds. What a difference a decade makes. Fiscal deficits have ballooned since the pandemic struck, with global public debt set to reach 100 per cent of gross domestic product this year as governments spend aggressively to counter the devastation Covid-19 has caused. Yet the IMF is sanguine. Indeed, its advice this week was that, where possible, governments should continue to spend until the virus is finally behind us and recoveries entrenched.
The IMF’s tolerance of debt marks the final nail in the coffin for the doctrine of austerity. But the grip that it held on economic ideology has long been loosening. The IMF itself acknowledged as early as 2013 that some elements of its prescription for Greece, which saw its GDP contract by 25 per cent, was too harsh. Lawmakers such as Jeremy Corbyn in the UK and Bernie Sanders in the US helped swing the political pendulum in favour of more aggressive state intervention in the economy. Yet until now, much of the heavy lifting was still being done by the world’s central banks, many of which have not only cut nominal interest rates close to zero but have spent trillions of dollars buying mostly sovereign debt. With monetary policymakers short on ammunition, there is, for the first time since the 1970s, an acceptance that fiscal policy must do its share. Even countries renowned for frugality, such as Germany, are spending big.
Borrowing has rarely been as cheap. Many countries now benefit from negative yields — including places such as Italy, where debt-to-GDP ratios are at levels that would have been considered high enough to warrant a rapid fiscal retrenchment in years gone by. Rates are likely to stay at rock bottom levels for years to come, meaning refinancing costs will remain low even if debt-to-GDP ratios rise further. Olivier Blanchard, a former IMF chief economist and prominent academic, used his address to the American Economic Association last year to make this point.
Monetary policymakers, with a few exceptions, are onside. Jay Powell, who as chair of the US Federal Reserve is the most powerful central banker in the world, has become fiscal cheerleader-in-chief, urging Congress to spend more to sustain the recovery. His counterparts in the UK and the eurozone have made similar pronouncements — unthinkable 10 years ago, when a clear separation between the fiscal and monetary arms of policymaking was seen as sacrosanct.
The death of austerity should not pave the way for profligacy. The IMF is clear that spending should focus on protecting the most deprived as well as so-called “high multiplier” areas, such as infrastructure, where it will boost growth prospects, in effect eventually paying for itself. While it is easier said than done to pick winners and losers, the thrust should be areas that can thrive in the post-pandemic landscape. For countries after a quick hit, spending on maintenance should provide a more or less immediate lift.
Governments must outline how they plan to reduce extraordinary spending once economies return to full strength. Yet coronavirus has led to economic disruption on a scale not seen since the second world war. As was the case after 1945, state investment is necessary to rebuild economies and provide jobs. The IMF’s message is that premature fiscal tightening in the aftermath of the crisis will harm, not heal, economies. It is one that ought to be welcomed — and heeded by politicians.