Foreword

The global economy has been subject to two significant global shocks, the Covid pandemic and the war in Ukraine. Adding across them, these events are forcing us to rethink some of our basic propositions on how it ought to be structured. The post global financial crisis settlement of ultra-low interest rates and escalating public and private debt seems no longer tenable. Nominal interest rates are being normalised in a manner that is exposing balance sheets to considerable risk in terms of debt service but also vulnerability in the face of future shocks. A prolonged war of attrition in Ukraine has raised sharply energy and food prices, in a world where supply chains have not fully recovered from the receding Covid cloud. The imposition and management of sanctions with Russia has opened up difficult questions about our economic relationships with the new economic giants of China and India. And in many countries, there are demands for a greater emphasis on the public sector to support health and defence. Expenditure in these areas is both expensive and increasingly necessary. This shift in emphasis is all taking place against a background of stuttering growth across much of the advanced world where long-held beliefs about ever-increasing living standards are having to be revised downwards. And so our monetary and fiscal frameworks are being put under a severe test. The groupthink that so often characterises central banks arguably led to a delayed exit from the extraordinarily loose monetary policies that were adopted first following the financial crisis and then sustained by the pandemic. The preconditions were therefore set for the negative supply shock to ignite a rapid increase in inflation, and that is precisely what we are now living through. Simple accounting of price rises will suggest that the dominant factors have been energy and food but when their supply is constrained in a world of excess demand, prices will rise by more than they might otherwise have done. Alas. But bygones are bygones as much of that historic error will work its way out of the system as base effects disappear over the course of this year. The error now would be to think collectively that rates must go up fast and stay high in order to offset the previous error. But it is quite possible for the world economy to move to a lower output path, while maintaining nearly full employment and near capacity levels of aggregate demand. The issue here is not to induce a sharp fall in demand under supply capacity to depress inflation, so much as to reduce the level of demand in line with impaired supply: a supply that has been scarred by Covid-19, the energy supply shocks, quiet quitting and some reduction in trade intensity. It is a more subtle form of engineering than the famous Volker deflation that is called for. There is no need to induce the depression we avoided after the global financial crisis. The worryingly high level, though, of public debt to income remains to be tackled. The first-best way is higher growth, and it seems likely that elevated levels of public debt may even be acting to dampen growth. Naturally we can consider another bout of fiscal consolidation, but that may tend to fall on those of bits of public investment that ought to help growth and on families that are in the bottom income brackets. Looking at the historical experience, large costly events like wars, were typically eventually accompanied by some moves towards increasing tax revenues by broadening the tax base. And as there can be little doubt that income and wealth inequalities have widened in the same countries that are suffering from low growth and high debt, it is now time to consider how we can raise tax revenues from the 21st century winners.