The Tribune

By RICARDO EVANGELISTA

Over the past two years, the US has witnessed a profound shift in economic policy, marking the dawn of a new era of big government spending. This transformation is driven by a combination of factors, including President Joe Biden’s ambitious initiatives, such as the Inflation Reduction Act and the CHIP Act, which are reminiscent of the largest government spending sprees of the 1930s. These initiatives not only aim to reboot the US economy but also set a precedent for the world to follow.

The contrast between this new era and the Reaganomics doctrine of the 1980s, the latter characterised by low taxes and a small state, could not be starker. While Ronald Reagan’s approach focused on limited government intervention, President Biden’s administration is embracing a more interventionist stance, emphasising the role of the state in addressing pressing national challenges.

One of the driving forces behind the shift in government spending priorities is the looming demographic changes in the Western world. In the OECD countries, by 2050, the number of people over 65 is expected to exceed those who are younger, thus placing substantial pressure on public finances for pensions and healthcare.

Moreover, Western states have accumulated significant debt levels following the gargantuan stimulus deployed during the COVID pandemic and even before, following the 2008 financial crisis. Some nations’ debt levels have surpassed their national GDP. The interest payments on this debt alone are adding substantial pressure to public finances, necessitating a re-evaluation of fiscal policies. This debt burden not only constrains a government’s ability to invest in critical areas but also threatens the long-term economic stability of these nations.

In addition to addressing demographic challenges and debt burdens, the imperative of transitioning to a greener economy is another significant driver of increased government spending. As the world grapples with the pressing issue of climate change, fiscal authorities are expected to be the catalyst for the necessary acceleration towards carbon neutrality. The state costs associated with this transition are substantial, encompassing investments in infrastructure and incentives for renewable energy sustainable technologies.

Amid these challenges, geopolitical instability has added another layer of complexity to the equation. The invasion of Ukraine by Russia, and China’s increasingly belligerent stance, have led to a rearmament trend, with defence spending on the rise. This rearmament puts additional pressure on already-stretched public finances, as governments strive to bolster their national security in an increasingly uncertain world.

To finance the increased spending, governments are pinning their hopes on increases in productivity and economic growth, which would generate larger fiscal income. This optimistic scenario is seen as the path to sustainable funding for these expansive policies. However, even if economic growth does materialise and generate more fiscal income, a prolonged era of heavy tax burdens looms on the horizon. Substantial tax rises may not be the immediate answer, but meaningful cuts also appear unlikely over the next few years.

As the world grapples with the challenges of the 21st century, the era of big government spending is a response to the pressing issues of our time. Demographic shifts, rising debt burdens, the imperative of a green transition and geopolitical instability have converged to redefine the role of the state in modern economies. The USis leading the way in this paradigm shift, and its success or failure will undoubtedly influence the policies of other nations. Ultimately, it remains to be seen whether this new era of big government spending will be the answer to the complex challenges we are facing, or an economic experiment with uncertain consequences. In either case, the path forward will require careful consideration of fiscal policies and their implications for the future.