The UK government can deploy the spending necessary to reach its net-zero goals despite current debt-to-GDP levels being relatively high, according to this paper from the Centre for the Understanding of Sustainable Prosperity.
The authors warn against cutting back spending, saying that such a move would be driven by outdated thinking about the likely impact of higher debts, and an overly-rigid conception of how monetary and fiscal policy should operate.
The report calls for greater flexibility in the use of monetary and fiscal policy, and better coordination between them. It says this would allow governments to support the green transition, while keeping inflation under control, and ensuring the debt-to-GDP level remains sustainable. It proposes a framework whereby monetary policy could take on a greater role in ensuring debt sustainability, and fiscal policy could focus more on managing demand.
The paper also suggests that unconventional monetary policies such as credit guidance could be used to curb or stimulate bank lending to specific sectors or for specific activities.
“Such an approach would allow the central bank to affect economic activity without altering interest rates – something that may be useful when public debts are high,” say the authors.
This page was last updated April 13, 2022
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