Across the world the level of public debt will increase this year, and if the past is any guide it will not return to pre-COVID-19 levels quickly. But if the economic recovery is to be sustained beyond 2020, governments will need to keep spending for as long as it takes the private sector to regain its confidence to spend.
Whether or not this happens is far from certain. 'Recovering better' remains the epithet of choice for policymakers, but relief measures adopted in advanced economies to ameliorate the economic damage from the pandemic are already coming under political pressure, even as the recovery shows signs of faltering. Meanwhile, inflationary hawks and deficit hyenas are once again warning of dire consequences if fiscal consolidation – “austerity” to the general public – is unduly delayed.
This was the policy advice followed after the 2009 crisis with damaging consequences – not only in terms of growth and incomes but also public finances, as governments took on more debt to compensate stagnant or falling tax revenues.
