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Our view

More fiscal space is needed when states prove too “small”

by Hans Dembowski

Opinion

Our era is one of unprecedented market failure. Global heating and the erosion of ecosystems result from buyers and sellers not bearing the costs that the external impacts of their self-serving transactions cost. The consequences are endangering our species’ future. To control the risks, governments must regulate markets, invest in eco-friendly infrastructure and, where possible, repair damages. Some still believe nonetheless that markets always deliver the best results, so government interventions must be limited to the bare minimum.

This distorted worldview has been very powerful since the early 1980s. Back then,  Britain’s Prime Minister Margaret Thatcher was a  protagonist of the paradigm shift towards the “small” state.  Now the short tenure of Liz Truss in the same office in 2022 may prove to be another turning point. 

In Thatcher’s tradition, Truss wanted to impress financial markets by cutting taxes. To provide essential services, she planned to increase sovereign debt. She hoped that policy would attract investors to Britain. Instead, the markets she wanted to please rejected her reckless approach. To stabilise the pound, the central bank had to raise interest rates drastically, making real-economy investments in Britain less attractive. Higher borrowing costs, moreover, now exacerbate Britain’s budget constraints.

Multiple crises reinforced by inflation

The international community must cope with multiple crises, which are reinforced by inflation. The Covid-19 pandemic was disruptive, and Russia’s invasion of Ukraine has compounded problems. We have seen how costly the neglect of healthcare and pandemic preparedness can be. The war, moreover, ended any notion of the peace dividend that the end of the Cold War offered.

Growing need makes social-protection spending more important. Military spending is going up in many places too. Subsidies to help businesses survive in difficult times are indispensable as well. National budgets are stretched accordingly. Sovereign debt has increased fast in many places. While things are especially desperate in developing countries, all governments currently lack the fiscal space they need. Prudent taxation, risks of sovereign default and looming implications deserve attention. How to keep urgent investments feasible in spite of rising interest rates is an important question too.

The key to solving global problems is international cooperation. Unfortunately, the complex and fragmented landscapes of multilateral institutions is not up to task (see Anna-Katharina Hornidge on www.dandc.eu). These institutions report to national governments, and an individual country can sabotage global consensus. As the sense of rivalry between major powers has grown, multilateral policymaking will remain incremental and piecemeal.

Nationalist egotism is unacceptable

It bears repetition that the nationalist egotism that motivates Russia’s imperialist war in Ukraine is unacceptable. It is compounding all other global problems and thus amounts to an attack on all of humankind (see a previous comment of mine on www.dandc.eu).

Nationalist egotism of the Brexit variety has proven harmful too, of course. The campaign to leave the EU was an example of plutocrat populism, sponsored by super-rich individuals who made people believe they were worse off due to the EU’s pooling of sovereignty (see another previous comment of mine on www.dandc.eu). What those oligarchs really resented was coordinated regulation across the EU, which protects people and the environment from market dynamics’ external effects. They hoped Brexit would result in race to the bottom.

Humankind does not need small states. We need competent and responsible governments.

Hans Dembowski is editor in chief of D+C Development and Cooperation / E+Z Entwicklung und Zusammenarbeit.
euz.editor@dandc.eu

 

Corrections, 25 November: This article accidentally was published a day earlier. We have adjusted the date. Moreover, two sentences have been slightly modified and now read: "Prudent taxation, risks of sovereign default and looming implications deserve attention. How to keep urgent investments feasible in spite of rising interest rates is an important question too."