The negative interest rate-growth differential before the pandemic helped to contain, or even reduce, debt-to-GDP ratios. The differential still stands near historic lows but is about to become less favourable (Slide 12, left-hand chart). Against this backdrop, current circumstances call for responsible fiscal policy.
Governments need to be clear that current budget deficits are backed by future primary surpluses, via either future higher tax rates or lower spending. If governments do not credibly signal their commitment to responsible fiscal policies, the private sector may eventually expect that higher inflation is needed to ensure the sustainability of public debt.