Don’t waste fiscal stimulus, invest it in mitigating climate change

Terell Odom, of Compass Solar Energy, moves a solar panel into place on a house in Milton, 11 Dec 2019 (Photo: Reuters).

Author: Editorial Board, ANU

The coronavirus is a huge health shock; it’s also a triple whammy economic demand, supply and financial shock. Its sizeable demand component warrants large-scale fiscal stimulus. Governments around the world are scrambling to do exactly that: injecting trillions of dollars into their ailing economies through spending increases and tax cuts.

The global financial crisis taught us plenty of lessons on what to do, and what not to do, when it comes to fiscal stimulus: focus on the things that can be done quickly and easily, target cash payments to those on low incomes who are more likely to spend it, and target support to small businesses which are more likely to suffer a cash flow crisis.

But there is one grand economic and political lesson that remains true today: when you have a crisis, don’t waste the opportunity.

An economic crisis is the perfect time to undertake large-scale government spending. Not only is it vital for boosting demand when the private sector is weak, the usual costs associated with increased spending are significantly reduced. Inflation is non-existent, interest rates are low, exchange rates are less responsive to fiscal shocks, and the global scramble to get into safe assets means investors are throwing cash at governments, offering historically low interest rates for governments to borrow.

Spending should target priority areas that will both quickly stimulate the economy and address long-standing structural challenges.

Action on climate change ticks both boxes.

There is no shortage of large-scale projects in energy, agriculture and transport that both need investment and would help reduce carbon emissions. There is similarly no shortage of commentators who have recommended that fiscal stimulus target these projects.

But this misses the point. One of the critical lessons from the global financial crisis is that fiscal stimulus needs to be implemented quickly if it is to …continue reading