Opinion – Solange Srour: The lesson from the UK

Last week, when the British government announced a tax cut of 45 billion euros – the second biggest in the last 50 years – financed entirely by debt increases, it looked like we were facing a commonplace situation: yet another government expanding fiscal policy. under the justification of increasing potential GDP. But the market’s response was intense: the pound hit an all-time low, and British bond yields soared. Had it not been for the intervention of the English central bank buying a high volume of public bonds and the government signaling a retreat, a systemic crisis could have developed.

I believe it is a mistake to assess what happened as a uniquely British problem. The message from the markets risks being more profound: the world is no longer so complacent with unsustainable fiscal policies, especially in countries that already have high deficits and high debt.

In the pre-pandemic world, with inflation and low interest rates, deficits were welcome, as they helped to avoid deflation and questions about the ability of monetary policy to deal with this problem. The ample global liquidity brought the feeling that the ability of governments to finance themselves was infinite, including for some emerging ones that spent as (or more than) those developed during the pandemic.

But now, after huge fiscal and monetary stimulus and facing a war, whose consequences for commodity prices seem to be structural, the reality is different. Inflation is high almost everywhere in the world; and, belatedly realizing that such a phenomenon is not temporary, the world’s leading central banks are raising rates at the fastest pace in nearly 40 years, tightening global financial conditions.

Some political leaders, however, still act as if they were in the previous world. They recognize that inflation is a problem, but continue to view fiscal policy as if limits do not exist.

In Europe, for example, budget deficits will fall this year, but will rise again in 2023 and 2024. Most countries in the region announced subsidies to energy prices with a major impact on deficits, as a way of avoiding both a second inflationary explosion and a deep recession.

Italy, with one of the most indebted governments in the world, has seen yields on its 10-year bonds drop from less than 1% last year to close to 4.5%, a move driven by the loss of political support for the targeted reform agenda. to fiscal consolidation.

After Mario Draghi’s resignation, Giorgia Meloni will be the country’s 70th leader since World War II. For her government to last longer than the historical average, she will have to abandon campaign promises and bring confidence that she will obtain the resources of the post-pandemic reconstruction package offered by the European Union to countries that advance in fiscal consolidation.

The US situation is no less worrying. While the dollar’s reserve status, so far, insulates the country from the pressures plaguing the UK and Italy, its fiscal policy is similarly poorly calibrated.

In 2020, the government appropriately approved $3.4 trillion in loans to fight the pandemic and stabilize the economy. Now, with the economy facing the lowest unemployment rate in 50 years, Biden has just increased spending on veterans benefits, infrastructure, semiconductors, Obamacare and student debt cancellation.

The Committee for a Responsible Federal Budget estimates that the current administration will increase deficits by $4.8 trillion, or 1.6% of GDP within a decade — comparable to the amount the UK is increasing its deficit by. A signal has already lit up: the real yield on five-year inflation-linked Treasury bonds this week touched 2%, after starting the year at -1.5%.

It is in this complex context that we are on hold to understand how Brazil will reformulate its fiscal rule and credibly signal a downward trajectory for public debt. The idea that the public sector can work with flexible restrictions is definitely behind us, as the English example shows.