Fiscal responsibility in advanced economies through investment for economic recovery from the COVID-19 pandemic

When the COVID-19 pandemic battered the economy and health of nations across the world, the first tasks were to tackle the virus, to prevent economic collapse, and to protect jobs and livelihoods. That was ‘rescue’. The task now is ‘recovery’. This paper argues that if that is to be sustained, strong and non-inflationary, it must be driven by private investment. In G7 countries, the bulk of investment is from the private sector, but this has declined substantially as a proportion of GDP, undermining productivity growth over recent decades.

The paper argues that:

  • The risks associated with higher public debt for advanced economies able to borrow in their own currency are currently substantially outweighed by the potential benefits from public action to drive investment for a sustained recovery.
  • The markets are signalling that there is no immediate problem in financing increased public borrowing. Despite nudging upwards, real interest rates remain generally close to historic lows, reflecting the fact that globally the desired level of private sector saving in aggregate is low relative to the desired level of aggregate investment.
  • These historically low interest rates reflect the market’s hunt for returns and help greatly with the affordability of governments’ rescue and recovery expenditures. Private sector savers in the advanced economies did not see many opportunities for productive investment. Facing few attractive options for where else to put their money, they were willing to buy government debt at ever-diminishing rates of interest. Clearly the challenge is to put in place the incentives for private investment; a commitment to growth and sound and stable signals on the directions of policy, particularly around sustainable low-carbon and climate-resilient investment and innovation.


  • Coordination of policies across government such that all relevant policies – macroeconomic, structural, industrial, innovation, skills, labour market, energy and other policy frameworks – work strategically together with supporting institutions, to drive the requisite economic recovery, investment, growth and structural change.
  • Countries commit to invest in R&D and deployment of new technologies and related networks, including mission-orientated support, to draw in private finance and induce productivity-enhancing clean innovation.
  • A clear and coherent macroeconomic and structural policy landscape for investment in recovery now and for building robust, resilient and sustainable assets that can secure strong productivity growth over the coming decades.
  • Secure debt sustainability through investment in productive capacity and growth, rather than short-term reliance on self-defeating fiscal tightening.
  • Public investment and infrastructure banks, operating with clear sustainability mandates, play a crucial role in reducing, sharing, and managing policy risk and thereby encourage private investment. This must be complemented by clear strategic planning for investment in zero-carbon and resilient infrastructure networks, backed by regulation that can enable the private sector to scale up investment.
  • All governments, and particularly those of the G7, should seek to make their fiscal policies for the recovery ‘predictably flexible’, with transparent and credible criteria for reducing deficits as sustainable growth returns.