Building back broader: a new approach to fiscal and monetary policy

The pandemic-induced lockdowns and the ensuing global recession of 2020 which followed have created a highly uncertain global economic outlook and had dramatic social consequences. Globalization is stalling, social cohesion is being eroded by unrest and political polarization, and the still unfolding economic crisis is threatening the livelihoods of those at the lower end of the income spectrum. As existing temporary support measures begin to expire in several countries, it will be of paramount importance to put in place the structural reforms that will help to build back not only better but also broader.

The latest white paper published by the World Economic Forum’s Centre for the New Economy and Society, Building Back Broader: Policy Pathways for a Post Pandemic Transformation, is the outcome of a set of multistakeholder dialogues which engaged six Global Future Councils. The Global Future Council on the New Agenda for Fiscal and Monetary Policy identified three policy pathways for the transformation of fiscal and monetary policy which could foster a fairer, greener and more inclusive post-pandemic world:

Rising inequality was already a major social and economic challenge before the pandemic. Some of the countries hardest hit by the pandemic were already facing the greatest inequalities. One of the defining features of the transformation which economies are experiencing is its asymmetric nature: people in lower-income work and in precarious jobs have borne the brunt of pandemic-related slowdowns, and racial, gender, and intergenerational inequalities have been exacerbated in many countries. Most households with limited resources are not equipped to respond to economic shocks, thus amplifying the adverse effects of the crisis.

Countries around the world have adopted a range of measures to support the economy, and to top-up existing social protection measures, extend benefits and increase their reach to broader swathes of the population more than ever before. But the approaches have been necessarily ad hoc, and attention now needs to be directed to what to keep and how to change. There should be commensurate focus on structural reforms which improve equality of opportunity through improved access to capability building and structural reforms, improving education access and quality as well as fostering lifelong learning, technology access as well as providing fair work opportunities.

More pro-active and efficient taxation systems must be designed to achieve more efficient taxation of capital and multinationals and improve global transparency. Designing more progressive taxation mechanisms and shifting the tax burden from the bottom to the top will be crucial to design more effective, agile and fairer tax policies. Fairer and more progressive taxation will be an essential mechanism to compensate for the uneven recovery underway, but also to provide higher revenue mobilization (especially in countries with lower tax capacity) and can contribute to financing social spending and structural reform.

We have recently witnessed an acceleration of the potential for an international agreement on a globally enforced minimum tax rate. According to the latest estimates from Tax Justice International, an estimated $427 billion in tax is lost every year to international corporate tax fraud and private tax evasion. The historical lack of multilateral cooperation and international tax agreements is precisely the issue which the OECD BEPS initiative aims to tackle, making profit shifting harder to achieve and less attractive to multinational enterprises. At the rate of 21% proposed by the Biden administration, modelling suggests that the OECD approach would raise some $540 billion in additional revenues annually. A UN tax convention could also set inclusive, ambitious standards for tax transparency and cooperation, which coupled with a global minimum corporate tax rate could mark the end of the international race to the bottom. We must urgently improve transparency and rewire our global tax system to prioritize people’s wellbeing and livelihoods.

A fundamental rethink of the frontier and roles of fiscal and monetary policy might be required, enhancing the coordination between different tools and policies during recessions as well as recoveries. Although the current macroeconomic framework primarily relies on central banks and monetary policies for taming business cycles, the effective lower bound problem is eminent. This implies that, where fiscal space is available, fiscal policy will need to play a greater role in supporting the economy. Furthermore, while current monetary policy tools might be effective at maintaining liquidity, they might not encourage the structural transformation towards fairer, more equitable and sustainable economies.

Greening the recovery must become a central dimension of both fiscal and monetary policy if operational targets on climate change are to be reached by 2030. Businesses, workers, and households will need to be supported through this transition to a low-carbon future ensuring mechanisms for a just transition are put in place. These measures should be crafted through social dialogue and consultation with all relevant stakeholders. The paradigm shift in fiscal and monetary policy we are experiencing must be perceived as an opportunity to embrace and accelerate the pace of transition towards a more environmentally sustainable economic future.

Economies were already facing several major global challenges before the pandemic: global inequalities (within and across countries), deflationary pressures, ageing populations, as well as climate change and environmental degradation. The depth of the economic shock triggered by the pandemic has exacerbated the need for effective, proportionate, and timely fiscal and monetary support to pave the way towards more inclusive and greener socio-economic systems, while ensuring fiscal sustainability.

The current conditions have prompted policy innovations and experiments around the world. Now is the time to prepare for the next phase of the post-pandemic world. Policymakers are challenged to recalibrate their priorities and restructure the ways they support the economy, creating the right environment to shape fairer, more inclusive and sustainable economies and societies

Building Back Broader: Policy Pathways for a Post Pandemic Transformation, is the outcome of a set of international, multistakeholder dialogues which engaged six Global Future Councils managed by the World Economic Forum’s Centre for the New Economy and Society.