'Tighter fiscal policy will not allow us to escape from long-term stagnation'

The call for a tighter fiscal policy after the corona crisis is growing. This should put an end to the growing mountain of debt. The CPB warned earlier that it is important to keep the budget in check in the coming years. Professor of Public Economics, Bas Jacobs, explains in an article in Het Financieele Dagblad why he has his doubts about this approach. 

According to Jacobs, the right approach depends on the economic situation, which is not always the same. Jacobs explains that the economy has been struggling with long-term stagnation for a decade now. ‘Therefore, the proposed policy will not allow us to escape from long-term stagnation; it will be another call for supply policy to deal with demand problems. Just like during the previous crisis’, he warns.

According to Jacobs, overspending is necessary to get inflation and interest rates stable again. It is a good thing that a somewhat more generous fiscal policy is now being structurally implemented. Preferably through greater government investment in education, R&D, infrastructure and the energy transition. However, Jacobs is also cautious about stimulus policies that are too loose, such as those currently being pursued by US President Biden. ‘Fiscal policy can go too far, as we now see happening in the US. There, budget deficits will exceed 15% of GDP this year and next year. It will be the biggest post-war economic policy experiment in the world.’

Jacobs expects inflation in the US to rise and the central banking system, the Fed, to raise interest rates. But that is no reason to return to monetary and fiscal orthodoxy, he says, just to take it a little bit easier than Biden is doing now.

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The full article from Het Financieele Dagblad, 3 June 2021, can be downloaded above (in Dutch).