Fight climate change with fiscal discipline - The Economic Times

Fight climate change with fiscal discipline - The Economic Times

International Monetary Fund and World Bank earlier this month, the world’s finance ministers and central bankers congratulated each other on progress in curbing inflation and reviving post-pandemic economic growth. But they also acknowledged an excess of unfinished work — in particular, on improving

financial stability, restoring fiscal discipline and fighting

climate change.

Governments need to see that these tasks, each vital in its own right, are linked. Fiscal control is essential for financial stability, and better

carbon-abatement policies can strengthen fiscal control. In a year of multiple elections, with more weight than usual given to empty promises and short-term calculations, getting this right won’t be easy. But the fact remains: These problems will most likely be solved together or not at all.

The pandemic drove public borrowing up almost everywhere. Governments spent heavily to cushion their economies as stalled output and employment reduced revenue. In much of the world, efforts to rein in the resulting surge of

public debt have barely begun. Current policy is not yet on track to stabilize the ratio of debt to gross domestic product at its pre-pandemic level.

Equally important, smart reforms in taxation and government spending can accelerate this effort and promote short-term fiscal control at the same time. In many countries, fossil-fuel subsidies are still a major (and growing) public outlay. They amounted to a staggering $7 trillion in 2022, equivalent to roughly 7% of global output. These subsidies are partly explicit (in the form of payments to offset the cost of producing energy) and partly implicit (in the form of pricing systems that ignore environmental damage and fail to tax emissions appropriately). Taken together, they neutralize other efforts to curb emissions via regulation and other direct controls — and dig heavily indebted governments into an even deeper hole.

For rich and poor countries alike, pursuing all three goals at once is not just necessary, but a matter of hardheaded self-interest.
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