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Leading Indicators: More austerity is not the answer

Resurrecting the fiscal response to the last global crisis will not work this time around. A new approach, focused on sustainability and lessening inequality, is urgently needed. Encouragingly, there are signs that, on this question at least, the international community is in agreement.

Simon Rubinsohn, Chief Economist, RICS
5 March 2021

Scroll back to the aftermath of the Global Financial Crisis (GFC) and the response from multilateral organisations such as the IMF and the OECD was pretty clear. The blowout in public debt resulting from the recession needed to be addressed and the way to do so was by significantly reining in public spending. This was austerity, and most governments, to a greater or lesser extent, bought into the approach.

The contrast this time around could not be clearer. IMF Managing Director, Kristalina Georgieva, has repeatedly made clear that, “it is essential to sustain support to businesses and workers…there must be no premature (policy) withdrawal.” Meanwhile, the OECD Chief Economist, Laurence Boone, recently noted that, “the first lesson (of the previous experience) is to make sure governments are not tightening (policy) one or two years following the trough of GDP.”

If developments in the US are any guide, these messages would seem to have been well heeded. Most notably, President Joe Biden is set to sign the full US$1.9bn American Rescue Plan into law in the coming weeks. This despite some concerns being expressed in Congress about the scale of the stimulus.

There are other striking differences in tone to the recommendations being made to governments this time around. One of them is on the issue of inequality; sustainability is another. It is quite unusual for institutions such as the IMF to wade into such politically sensitive territory, but that is precisely where many are now settled. This is equally true of their pronouncements on both the global picture and specific national developments. It is not difficult to see why they have felt emboldened to move in this direction.

World Bank statistics suggest that the pandemic has plunged between 88 and 115 million more people into extreme poverty (defined as surviving on less than US$1.90 per day). That number will probably rise further over the course of this year. Meanwhile, in the more advanced economies, the stark contrast between those able to continue working (albeit in somewhat different conditions) and those less fortunate is clear. I was particularly struck by Bank of England analysis showing a sharp rise in aggregate household savings over the past year. Evidently, the pain suffered during 2020 was not shared equally.

World Bank statistics suggest that the pandemic has plunged between 88 and 115 million more people into extreme poverty. That number will probably rise further over the course of this year.

This accumulation in wealth is cited as a key cause for optimism regarding the prospects of a sharp economic rebound over the course of 2021. One central banker has likened the possible effect to that of a “coiled spring”. And that is, of course, before we take into account the rise in assets values associated with the latest uplift in residential property prices. This is a truly remarkable phenomenon in the midst of such a sharp economic contraction.

Pushing back on inequality is a complex issue requiring, I strongly believe, a successful global economy at its core. Promoting policy remedies that hamper the macro recovery, however unintentionally, will complicate the delivery of a raft of measures required to reverse rising inequality. It will also impede efforts to scale back the massive debt overhang. But the lesson of recent decades is that strong economies alone will not lead to the creation of a more equal landscape.

The IMF and the OECD are both advocating significant investment in retraining and reskilling programs to improve reemployment prospects for displaced workers. In addition, they make the case for stronger social assistance for low-income households, and an expansion social insurance schemes. This should include relaxation of eligibility criteria for unemployment benefits, and extensions to paid family and sick leave coverage.

Investment in the right infrastructure projects can help to correct long-standing inequalities by improving connectivity and enhancing access to goods and services for underserved populations.

Alongside this, the built environment has a significant role to play in helping to facilitate a sustainable and inclusive recovery. We know that targeted infrastructure investment will provide a proven jumpstart for post-pandemic economies. But investment in the right projects can also help to correct long-standing inequalities by improving connectivity and enhancing access to goods and services for underserved populations

Meanwhile the OECD has rightly noted that the pandemic has “brought to the fore the enduring housing affordability and quality gaps facing many households.” A report from last year concluded that both social housing construction and renovation “should be a central part of a more sustainable, inclusive economic recovery.”

I am optimistic that this focus on inequality will not be lost as the global economy begins to recover; the issue is now firmly on the political agenda. Building a more inclusive global economy will take time, there is no quick fix. However, there now exists an opportunity to deliver an equitable and material range of benefits over the medium-term. With public and private sector working together on a range of measures, we can create a more sustainable economic environment.