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The Bank of International Settlements (BIS) has issued a warning that governments should consider implementing policies to cool down price growth in their economies, citing the need to close the gap between government income and expenditure.
The BIS explains that such measures would lessen the need for further monetary policy tightening and mitigate the risk of the sovereign itself becoming a source of financial instability. (Photo: Bitcoinist)
Bank of International Settlements Advice: Cut Spending or Raise Taxes
According to the BIS’s annual report, which provides guidance to 63 central banks covering 95% of global economic output, raising taxes or cutting public spending is crucial to “calm inflation.”
The institution further emphasized that these measures would be the “last leg” in the battle against inflation, which remains a significant concern despite central banks worldwide raising interest rates, the Guardian reported.
The BIS highlights that governments that undertake spending cuts or tax increases would effectively reduce both business and consumer demand, serving as a critical component in taming the rapid rate of price growth.
However, the institution acknowledges that this final push would also be the most challenging.
In light of mounting fears that the UK economy might be heading towards a recession following a series of sharp interest rate increases, the BIS took a firm stance, suggesting that higher taxes and reduced spending could help “contain financial instability risks in several ways.”
The BIS explains that such measures would lessen the need for further monetary policy tightening and mitigate the risk of the sovereign itself becoming a source of financial instability.
Additionally, it would create more room for crisis management in collaboration with central banks, allowing for more flexibility in deploying public resources.
The Taxpayers’ Alliance has called for additional spending cuts, but contrary to the BIS’s argument, they advocate using the generated funds for tax reductions.
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Bank of International Settlements Warning
The BIS warns that failure to significantly reduce the inflation rate in the near term could have devastating consequences for economies. While inflation has decreased from recent historic highs in many countries, there is still a serious risk posed by a prolonged crisis.
The BIS emphasizes that the longer inflation persists, the greater the likelihood of it becoming rooted and the more costly it will be to suppress.
While both the government and the Bank of England, like other economies, have faced criticism for their inability to effectively control inflation, the BIS acknowledges that their roles in slowing price growth have limitations.
The report points out that recent calls for significant government interventions, such as providing financial support to British mortgage holders affected by higher monthly payments, stem from decades of relying on monetary and fiscal policies as the primary engines of growth.
The BIS report underlines the critical role of fiscal policy and the need for consolidation. It states that consolidation would help address both near-term and long-term challenges, soothing inflation by alleviating pressure on productive capacity.
The report emphasizes the importance of maintaining a delicate balance between taxation, government spending, and interest rates to maintain public trust in economic management.
