Countries should repurpose fiscal policies to weather future storms: President Tharman

Current system of taxes and transfers no longer breeds optimism, he says

- Annabelle Liang Correspondent

President Tharman Shanmugaratnam receiving the MIT Golub Center for Finance and Policy's Miriam Pozen Prize from MIT Sloan School of Management senior lecturer Robert Pozen on Dec 9. PHOTO: PRESIDENT'S OFFICE

(PRESIDENT'S OFFICE)

Governments should make adjustments to taxes and spending in order to manage debts and put their finances on a sustainable track, an approach that would also better enable them to tackle future challenges like ageing and climate change, President Tharman Shanmugaratnam said.

These efforts to repurpose fiscal policies should be focused on more than raising taxes or cutting spending, although these measures will likely be necessary, he said in a lecture at the Massachusetts Institute of Technology (MIT) Sloan School of Management on Dec 9.

“This should not be simply a call for fiscal austerity,” he added.

“The challenge is to make these adjustments while repurposing fiscal policy more fundamentally: so that people can see that the adjustments are fairly distributed across society; can see the value in government spending that their taxes support, and so that the adjustments do not permanently reduce growth.”

Mr Tharman said that a longer delay to bring debts back onto a sustainable track will mean larger adjustments in taxes and spending, and more excruciating political choices will need to be made. This risks unravelling the social fabric on which democracies depend, and which sustains their prosperity, he noted.

He added that advanced economies have been given a wider leeway to run up debts, and this has created a systemic risk of financial instability.

The gross debts of Group of Seven countries now average about 120 per cent of gross domestic product, ranging from Germany’s 63 per cent to Japan’s 240 per cent.

In the case of the United States, around 18 per cent to 19 per cent of total federal revenues is now spent on interest payments.