الى الوراء
28 نوفمبر 2023

Monetary and Fiscal Policies are out of Balance

Thomas Krantz
Advisor to the Managing Director
In an era where financial growth hinges on debt issuance and central banks' pivotal roles, a paradigm shift may be looming, challenging the long-standing reliance on low taxes and central bank bailouts. The OECD's push for a global corporate tax rate and growing frustration with progress signal a potential handover of global tax policy to the United Nations. As prominent economists highlight the failure to reform fiscal policies, the debate intensifies, urging financial center leaders, particularly WAIFC members, to reevaluate the equilibrium between monetary and fiscal tools in guiding economic stability and growth.

It may be time for financial center leaders to take up the usually untouchable, highly political tax rate question in their communications with members and government officials. 

In most WAIFC member jurisdictions, central banks have been granted independence by governments to manage monetary policy, which includes setting the main interest benchmark rates and easing or tightening credit through their money market activities.  The larger economies have also seen massive central bank purchases of public debt, under the invented term of “quantitative easing” – though the markets do have their own way of responding to those benchmarks in their trading activities.  What is going on?


The Multi-Decade Paradigm for Economic Stabilization

For the past four decades, much of the world’s economic growth has been driven by debt issuance, by governments and the private sector. Critically for this opinion, in times of crisis, eyes turned to central bankers for help with bailouts in the form of ultra- low interest rates. Far less was put forward by governments in terms of tax matters as part of a balanced, macroeconomic solution.

Whatever the government, the prevailing market economy paradigm – the way to go forward - was to keep taxes low, and in most financial centers also highly complex. Indeed, for corporations and for individuals, there have been cuts in rates with an eye on jurisdictions meeting the needs of competitive tax regimes across the world. 

It is not clear whether the capital destruction of the Global Financial Crisis of 2008-2009 was ever fully made up. More recently, with the historically massive costs incurred by government responses to Covid adding to growing public debt, there might be a shift underway towards a more balanced use of monetary and fiscal tools to guide macroeconomic outcomes.

Is the paradigm shifting?  Is something in the air?  What should WAIFC members do about it?


The OECD Programs

For decades, the Organization for Economic Cooperation and Development has worked on global tax questions, not just the taxation policies in its member jurisdictions. Taxes are, after all, a public good for governments everywhere to collect and then allocate in order to meet social needs. This money is a resource for a country and the way to cover the costs of government; that is the point. 

Historically, the first OECD goal was to set out an international tax treaty framework at the governmental level, so that there is a more common basis for international businesses of all kinds, including finance, that reduces obstacles to business growth.[1] Double taxation needs to be avoided, at a minimum. It is terribly hard to set common rules for the global economy, but their high-level value is to give a common vocabulary and direction.  Exact commonality is extraordinarily hard to achieve because that depends on the wording of national legislation when broad global principles are turned into law.  The OECD has regularly updated its framework as economies and law evolve.

Since the Global Financial Crisis and the progressive change in tone in government policy and supported by the reinforcement of the Financial Stability Board as an active secretariat for G20 governments, the OECD has worked to establish a minimum global corporate tax rate to limit tax avoidance by shifting profits from one jurisdiction to another. The permanent working party is on Base Erosion and Profit Shifting Project, in other words, how to maintain a fiscal base in each country to support social needs. The most recent achievement in this ongoing effort came in July 2023, when 140 governments under the OECD/G20 Framework signed the Outcome Framework that has a particular focus on the effects of digitization of business on tax collection.  

Frustration with progress within the OECD has led to advanced discussions in the United Nations system to take over global tax policy. Tax matters are indeed in the air.


Current Thought Leadership on Taxation

Financial crises these past decades have shaken the prevailing consensus of pairing low tax regimes coupled with central bank bailouts for major stricken financial actors, using the public purse. It was never actually free.  Given current high levels of public and private debt almost everywhere, the paradigm on balancing fiscal and monetary policy may be heading towards a half-century change.

Harvard professor of economics Kenneth Rogoff published a short essay in August 2023 titled "Fiscal Policy Should Return to Fundamentals”.[2]  It is worth a short citation:

“Before the 2008 global financial crisis, the consensus was that monetary policy should take the lead in dealing with ordinary business cycles. Fiscal policy should play a supporting role, except in the event of wars and natural catastrophes such as pandemics. When systemic financial crises occurred, the thinking went, monetary policy could respond immediately but fiscal policy should quickly follow and take the lead over time.”

Except that governments have not modified fiscal policies in a way that rebalances macroeconomic stability and growth by better use of both of these two basic tools.

For a view within the EU, in November 2023 Guido Alfani, professor of economic history at Boconi University in Milan, published an opinion in the New York Times.[3] The title says it all: “What Happens When the Super Rich Are This Selfish?  (It Isn’t Pretty.)” True enough, taxing the poor does not raise as much revenue. Again, to cite the author:

“Today’s rich, their wealth largely preserved through the Great Recession and the Covid-19 pandemic, have opposed reforms aimed at tapping their resources to fund [social] mitigation policies of all kinds. This is a historically exceptional development. Helping foot the bill of major crises has long been the main social function attributed to the rich by Western culture.”

And one more excerpt:

“Recent surveys of fiscal reforms by European countries in the wake of the Covid-19 pandemic show that increases in the top rates of the personal income tax or (where they exist) of wealth taxes have been rare and modest. In the United States, proposals by the Biden administration to increase taxation for the richest, such as the ‘billionaire minimum income tax,’ have failed to gather sufficient political support. This is troubling, because the rich have stopped fulfilling the social role that has been their own for many centuries, making their position in society somewhat unclear.”

These two prominent economists have raised the question and pointed the finger towards solutions, along with manty others.


WAIFC Members and This Debate

The essential point of a financial center is to ensure the supply of investment capital and its deployment to efficient, profitable ends. The role governments play in this is to assure a stable environment in which this business decisions can be taken.

If the half-century paradigm of relying mainly on central bank monetary policy to assure both crisis recovery and long-term economic growth is trending towards a different balance between monetary and fiscal tools, and if that rebalancing makes sense in their jurisdictions, then this association’s leaders have every reason to step forward in their national debates. Change may not make sense in many financial centers – but questioning the balance always does.

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