1. What is the role of the finance minister in an age of ‘poly-crisis’?

This was one of the underlying questions that cut across both days of the conference. While this is hardly surprising for an event that centres on public finance, it nevertheless highlights the multiple challenges finance ministers must grapple with.

How do you balance spending demands with the need to ensure that public finances are on a sustainable path? Or shorter-term spending priorities with longer-term ones? And how can a finance minister promote growth?

Fiscal and economic resilience

New phrases are entering the lexicon of policy-makers, with ‘economic stabilisation’ being reframed in terms of fiscal and economic resilience.

Recalling his own time as the Chilean Minister of Finance, Andrés Velasco provided a classic example of fiscal and economic resilience whereby resisting short-term demands during good times allowed the country to respond to bad times.

In contrast, most countries are already in a bind as a result of the poly-crisis, with debt and deficit levels much higher now than they were after the global financial crisis. This is making it difficult (or, in the case of many lower-income countries, impossible) for governments to respond to longer-term challenges including mitigating and adapting to the effects of the climate crisis and preparing for future health emergencies. Even in a high-income country like the United Kingdom, Richard Hughes noted that dealing with current crises is hindering the Treasury’s efforts to act on the advice of the Office for Budget Responsibility on meeting its net zero commitments, despite the fact that the climate crisis presents serious long-term economic and fiscal risks (which would be less costly if addressed early). While in small island states such as Dominica, responding to the climate crisis is already the most pressing public expenditure issue, and mobilising the resources to do so the biggest challenge.

Balancing short- and long-term priorities

India’s former finance secretary Arvind Mayaram told the conference that the country’s salient spending pressures are shorter-term ones around poverty and redistribution, even if there is recognition that the climate crisis exacerbates the effects of these inequalities. Dealing with both short-term financing pressures and long-term challenges will not be easy.

While there was consensus that the type of austerity imposed after the global financial crisis would not resolve today’s problems, panellists nevertheless acknowledged the need for fiscal consolidation to put public finances on a sustainable path, with increases in taxation (as opposed to spending cuts) playing a greater role this time round. Ultimately, borrowing more cannot be the response to every shock. There was also broad agreement that the ‘poly-crisis’ is here to stay. Recent events in the Middle East have only served to confirm this view.

In the words of Andrés Velasco, now is the time to be ‘bold, but tight-fisted’. This means that:

• In the short term, finance ministries will be making decisions in the face of extreme uncertainty. They will need to determine the political feasibility of raising more revenues (and mobilising more concessional financing to finance deficits in the case of lower-income countries).
• Over the medium term, finance ministries will need to (re)establish ‘credible anchors’ for budgeting in the fiscal squeeze. Ministries in lower-income countries must also decide what is realistic in terms of domestic revenue mobilisation.

However, finance ministers should not neglect their broader role in economic policy. After all, sustainably growing the denominator – gross domestic product (GDP) – is one of the best ways of reducing fiscal deficits and debt. In particular, responding to the climate crisis presents opportunities for growth that many countries should exploit, especially in Africa where raw materials, critical minerals and renewable energy sources are plentiful.

Refining our public financial management toolkit

Achieving fiscal resilience will also mean refining the public financial management toolkit. While accepting that the current toolkit is broadly practical, Marc Robinson was at pains to insist that it needs to be better tailored and applied. Existing tools such as setting fiscal targets and rules, expenditure ceilings, spending reviews and the rigour of budget routines are more relevant now than ever. Nevertheless, the objectives per se may need revisiting. The question that should be asked is: ‘Which of these tools are useful for the outcomes we are trying to achieve?’

To this end, ODI is looking forward to working with the World Bank over the next six months on their Reimagining Public Finance initiative, which will include updating the Public Expenditure Management Handbook for the first time in more than 25 years. You can also expect more from ODI’s tax team on the technical and political feasibility of raising revenues in lower-income countries.

2. How do we engineer a better global allocation of resources?

Broadly speaking, finance ministries are concerned with the allocation of domestic resources. While efficiently reallocating spending from lower- to higher-priority areas as part of fiscal consolidation efforts has never been more important, there is a related and equally significant arena beyond domestic fiscal policy that demands greater attention: the mobilisation of international resources.

This was the central theme of Adam Tooze’s keynote address – one that was picked up by others throughout the conference. Unfortunately, the picture is rather bleak.

Mobilising private finance

A recurring topic throughout the conference (see especially Amélie de Montchalin’s contributions in the closing session) was the need to mobilise private finance for the ‘green transition’ and the challenges arising from doing so.

While Global North countries are forging ahead with ambitious plans, these same initiatives (e.g. the US Inflation Reduction Act and the European Green Deal) are acting as ‘massive vacuum cleaners for investment globally’. This is resulting in a misallocation of resources on a global scale given the sharpest jump in clean energy investment is needed in emerging markets and developing economies other than China. Meanwhile, initiatives like the Just Energy Transition Partnerships are stymied by a lack of international coordination (particularly on the price of carbon). It is crucial that realistic assessments are prepared by development finance providers but also think tanks on the likelihood of shifting vast pools of private commercial capital from advanced economies to the Global South at the scale currently envisaged in global policy discussions. ODI will soon publish a study focusing specifically on institutional investors in a number of European markets. More research is also required on the necessary steps to ‘localise finance’ through the development of local capital markets and how to accelerate the role of national development banks in the green transition.

Concessional financing

Even on the more traditional front of providing concessional financing, the Global North is falling short.

Reform of the international financial architecture is proceeding too slowly. Sub-Saharan Africa – which is expected to provide one in every two entrants to the global workforce over the next 10 to 20 years – needs more investment in human development. The myopic decision by some G7 countries to reallocate official development assistance (ODA) in order to cover the cost of hosting refugees is certainly not helping. Meanwhile, the wait goes on for a debt restructuring mechanism that is predictable, efficient, timely and that helps to free up fiscal space for the long-term investments needed to deal with a changing climate. The need for bigger multilateral development banks (MDBs) to address the myriad challenges that countries face was brought to light in the G20 Independent Expert Group’s report on strengthening MDBs, particularly regarding the affordability of borrowing costs. However, sources of concessional finance are unlikely to increase dramatically as donors re-evaluate the size and scale of their ODA budgets in a polarised world that is fast looking beyond aid sources of finance. This means that the ways in which concessional funding is (or is not) used and leveraged globally will matter more than ever.

3. What is the role of redistribution in times of crisis?

In this time of ‘poly-crisis’, there has been renewed interest in the role of fiscal redistribution to address rising poverty and income inequality. Higher-income countries boast a greater capacity to redistribute than their lower-income counterparts. World Bank Chief Economist Indermit Gill highlighted the limited role of tax and transfers in alleviating poverty and income inequality on average in lower-income countries, including during the Covid-19 pandemic. Drawing on the findings of the 2022 Poverty and Shared Prosperity report, Gill noted that the lack of additional spending in lower-income countries at this time was partly due to low tax revenues.

But policy choices also matter. While many countries need to tax more to create space for expanding social spending, the resources available can also be better targeted to the poor. Regressive subsidies on energy and agricultural activities typically account for a much larger share of GDP than more progressive cash or in-kind transfers.

These facts sparked a lively debate on the appropriate direction for fiscal policy. Should governments take these constraints as given and focus on long-term growth over redistribution? Or can these limitations be overcome? In Gill’s view, lower-income countries should prioritise investments in human capital through spending on education, health and infrastructure while also pivoting away from a reliance on general subsidies in both good times and bad. As these countries grow, they will reach income levels where fiscal redistribution is more effective.

But better designed and managed spending can also improve the impact of redistribution, whatever the total level of expenditure. The session on targeted and responsive fiscal policy highlighted successful examples of targeted cash transfers alleviating poverty and income inequality in the context of lower- and middle-income countries. The discussion noted the potential of digital capabilities to improve delivery systems, reducing the constraints posed by informal labour markets in countries as varied as Ethiopia, India and Togo.

Gill reiterated that while taxing and spending in lower-income countries can be made more progressive, these economies are still ‘fighting the odds’. In the coming years we look forward to supporting governments to fight those odds through various ODI initiatives including the Digital Public Finance Hub and the TaxDev research and country partnerships.

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