emerging
Fiscal Activism Replaces Austerity
Governments are shifting from austerity to fiscal activism, prioritizing investment in infrastructure, technology, and national security.
Timeframe
near-term
Subcategories
Detailed Analysis
The era of fiscal austerity following the global financial crisis is ending, replaced by a new focus on government spending and investment. This shift is driven by a combination of factors, including the need to address vulnerabilities exposed by the pandemic and geopolitical tensions, as well as growing public fatigue with austerity measures. "The pandemic forced governments to take a new route. The Covid crisis demanded massive levels of spending…to address national vulnerabilities…exacerbated by Russia's invasion of Ukraine and the global energy crisis." This fiscal activism, while potentially boosting economic growth, also carries risks. The report highlights the importance of directing spending towards productive investments that stimulate supply rather than simply fueling demand. "Improving real growth – not merely fueling higher inflation - will require investments that stimulate supply rather than purely boost demand." The effectiveness of this approach will depend on governments' ability to resist political pressures and prioritize long-term growth enhancements over short-term gains.
Context Signals
Government debt levels are higher than post-financial crisis.
Public weariness of austerity is a key driver.
Focus on supply-side investments is crucial.
Edge
Increased bond market volatility as bonds reclaim their role as a check on fiscal policy.
Potential for misallocation of capital if spending is not carefully targeted.
Opportunity for active managers to identify companies benefiting from government spending.
