Government Fiscal Policies

Inflation Isn’t Just a Central Bank Story I’ve been reading the new booklet on inflation by John H. Cochrane. It’s short, clear, and very relevant for policymakers. It’s also a useful reminder. We often talk about inflation as if it’s mainly a central bank problem: Raise rates. Tighten policy. Inflation falls. But Cochrane makes a broader point: Inflation is also about fiscal policy — and whether people trust it. Here’s the intuition. Governments issue money and debt. People hold them because they believe the state will, over time, back them with future revenues and disciplined spending. When that belief is solid, prices stay anchored. When it weakens — when people doubt the plan — prices adjust. Inflation becomes part of how the system “makes the numbers add up.” That’s why some inflation episodes are hard to understand if you only look at interest rates. Big deficits with no clear medium-term path can eventually show up in prices — even if it takes time. And this leads to a practical lesson from the booklet: Monetary policy can’t do the job alone. If fiscal policy is not credible, central banks have to push harder. That’s costly. And higher rates can even worsen public finances through higher debt service. So the most durable inflation strategy is not just higher rates. It’s also:    •   believable medium-term fiscal plans    •   transparent budgets    •   clear debt paths    •   policies that show governments will do what they say When fiscal foundations are strong, inflation is easier to control. When they’re weak, even the best central bank struggles. For policymakers, that’s the key message of this booklet. 📖 https://lnkd.in/dbSKgR4Z #Inflation #FiscalPolicy #MonetaryPolicy #PublicDebt #Macroeconomics

The Budget That Took Me by Surprise... Every year, the Indian middle class does the same thing on Budget Day. They sit in front of their TVs, hoping—just hoping—that something will finally go their way. But in the end? Nothing really changes. Maybe a small relief here and there, but overall, the weight on their shoulders just keeps increasing. But this year’s budget? It felt different. For the first time, I felt a sense of lightness. A sense of relief. And I’ll admit—it even got me emotional. Because for the first time, the government has acknowledged the pressure on the middle class in a way that actually matters. Why? Because they’ve removed all taxes under ₹12 lakh income. Let that sink in. This is a direct response to the growing financial burden of inflation. If you think about it, earning ₹1 lakh per month today is almost the same as earning ₹50,000 a decade ago. Purchasing power has shifted, but expenses—especially in metro cities—have skyrocketed. Rents are higher. Real estate is more expensive. Education and healthcare are getting out of reach. For a family of four in a metro, even ₹1 lakh a month can feel barely enough to sustain a decent lifestyle. This budget recognizes that reality. But is this just election appeasement? At first, I wondered the same. But here’s why I don’t think so: The government has managed to keep the fiscal deficit below 5%, which is no small feat. The reported fiscal deficit for last year was 4.8%, and even after this major tax cut, it’s projected to drop to 4.4%. That’s incredible. Yes, there are still unanswered questions. How exactly will the government offset this loss of tax revenue? There will need to be new and innovative ways to collect taxes. But one thing is clear—India’s tax collection system has already improved drastically, and that’s bringing in more revenue than ever before. Investors, however, seem unimpressed… There wasn’t much for any specific sector in this budget, which left many investors wanting more. But here’s what I think they’re missing: With more disposable income in people’s hands, money will flow into the stock markets. More consumer spending means stronger demand. Stronger demand attracts companies, FDIs, and investments. It’s a domino effect—and it’s powerful. My only complaint? I was hoping for a reduction in GST on insurance premiums and a few other areas, but overall, this is a budget that’s very difficult to critique. For now, I see this giving the stock market short- to medium-term strength. But that’s just my take. What do you think? Yours Truly Goela

Decoding Central Government's Market Borrowing: A Shift Towards Long-Term Maturities In an intriguing shift in its borrowing strategy, the Central Government has been extending the maturity periods of its market borrowings significantly since FY26. This evolution in borrowing patterns offers deep insights into the government's fiscal management and its implications for the economy. 1. Long-Term Borrowing Strategy: Starting from FY26, there has been a noticeable pivot towards bonds with maturities ranging between 30 to 50 years. This is a marked shift from the previous strategies where, from FY03 to FY23, the maximum borrowing term was capped at 30 years, and even earlier, from FY96 to FY02, the focus was predominantly on 20-year maturity securities. 2. Implications on Interest Obligations: This strategic shift in borrowing indicates a nuanced understanding of financial management by the government, emphasizing the anticipated "expected inflation" over mere policy rates. As the tenure of government bonds lengthens, the implications become twofold: a) The interest obligation of the Government of India (GOI) becomes more influenced by long-term inflation expectations rather than just the current policy rates. b) Despite potential reductions in policy rates, the government's interest expenses could remain elevated if the long-term expected inflation remains high, a scenario underscored in FY24. Remarkably, over 50% of the bond volume (amounting to Rs 7.16 Lakh Cr) was allocated to bonds with maturities of 13 years or more. c) This pattern suggests a prudent but cautious approach, implying that reducing policy rates alone may not suffice in lowering the government's interest payment burdens unless there is a concurrent dip in expected inflation, which historically tends to be persistent. Understanding these dynamics is crucial for financial analysts, policy-makers, and investors alike, offering a lens through which to view the government's fiscal strategies and their broader economic implications. #CentralGovernment #MarketBorrowing #FiscalPolicy #EconomicInsights #InflationExpectations #FinancialManagement #GovernmentBonds #PolicyRates #InvestmentStrategy #EconomicAnalysis

Where the fiscal stops, the monetary begins: Today's budget was a clear shift of focus from capex to consumption. While the last few years had seen a major shift and increase to capex spending, for FY26, capex remains almost constant at 11.1 TN INR. It is perhaps high time that the so called private crowding in effect of high govt capex actually take place which has been missing for last few years. It is the consumption push which this budget focusses on by rationalisation of tax slabs across all income slabs. But consumption always has lower multiplier effect on growth than investment spending. Hence the core issue of anemic growth remains unsolved considering today's budget still continues to be fiscally conservative. So if the problem statement is that there is a growth issue with Indian economy then the solution now entire lies in monetary levers since fiscal lever has not been used in today's budget. Assuming potential output at 7% for Indian economy even at 6.5% for FY26 (which looks aggressive), output loss is significant. And most of the output loss is on account of high real rates & misplaced notions of FX stability & inflation growth dynamics. Indian equities saw a 78k Crs outflow from FPIs in Jan'25. For FY25, it is -89k Crs. FPI shareholdings in equities have fallen from long term average of 18-19% levels to 16%. FPIs are exiting not only because they are getting comfortable exit levels because of domestic fund flows but also because India's current growth nos do not justify the high valuations. Only if the FPIs see a growth opportunity then only they might return to equities. That will also solve the deprecation issue of INR. So contrary to theoretical concept that lower rates might lead to further depreciation, the reverse could be true. And this is evident in recent monetary policy actions of Indonesia, China, ECB. Each country is trying to preserve it's growth in an environment of global instability due to tariffs/wars/dxy strength. Moving on to monetary side, local policy rates have been kept elevated to protect INR volatility as well as high food inflation. But this has led to a significant growth sacrifice. Perhaps it is time to let INR function as per market forces and use the monetary lever to stimulate growth. Else both INR & growth will suffer. Hence the need for monetary action to cut rates by 75bps in FY26 in an environment of sufficient core liquidity. FY27 has a huge repayment wall of 7TN INR in IGBs. As the banker for GoI, refinancing such a huge maturity at elevated rates will only spoil the interest serviceability of the sovereign. For that reason too, local rates need to come down significantly in FY26. Summary: While there might be short term pain points for bond yields due to higher switch, slightly higher gross borrowing etc today, in medium term local rates in India can fall significantly in FY26. Expecting 50 bps CRR cut & the 1st 25 bps repo rate cut in Feb policy. Total 75-100 bps cut in FY26. O

Fiscal Maturity in an FTA-Driven, Multipolar World India’s shift from a fiscal deficit-centric framework to a debt-to-GDP-based fiscal anchor marks a clear maturation of its fiscal policy architecture. It reflects a transition from short-term control toward long-term stewardship—from managing annual numbers to managing the nation’s economic balance sheet. By prioritising debt sustainability while preserving flexibility for growth-oriented spending, the new framework seeks to balance macroeconomic stability with developmental aspirations. It aligns fiscal policy with India’s expanding role in global trade, its engagement through ambitious Free Trade Agreements, and its emergence as one of the world’s largest economies. Yet, this transition is not guaranteed to succeed. It will depend on robust nominal growth, disciplined and transparent borrowing, and meaningful participation by states. Cooperative fiscal federalism, rooted in trust, coordination, and shared responsibility, will be more critical than ever. Ultimately, the shift is not merely technical. It is philosophical. It signals that India is ready to be judged not just on how tightly it controls spending, but on how wisely it invests in its future. In embracing a debt-to-GDP anchor, India is choosing fiscal statecraft over fiscal symbolism and laying the foundations for sustainable growth in an increasingly complex world.

Germany's Historic €1 Trillion Fiscal Pivot: Positive for both Germany and the Rest of Europe Germany has announced one of the most significant economic policy shifts in Europe since reunification. Under chancellor-designate Friedrich Merz, the longtime champion of fiscal discipline is abandoning its austere approach with a €1 trillion spending plan focused on infrastructure, defense, and economic revitalization. Markets reacted dramatically: • Euro surged to $1.08, highest since early November • German 10-year bond yields jumped 30 basis points – worst sell-off since 1990 • DAX benchmark rose 3.4%, best performance in nearly 2.5 years • Construction stocks and banks saw massive gains (15%+ for companies like Kion) This isn't a crisis response but a strategic geopolitical calculation amid uncertainty about America's commitment to European security under Trump's return. The move could boost German growth to 1.5-2% by 2027, reversing its "sick man of Europe" status. For investors, opportunities abound in defense, infrastructure, and green energy sectors, though higher rates may persist if inflation follows. Despite market enthusiasm, political hurdles remain as Merz faces resistance within his own party to this dramatic reversal of Germany's fiscal conservatism. If successful, this marks the beginning of a new era of European fiscal activism with profound implications for global markets and the future of the European project. #EconomicPolicy #EuropeanMarkets #FiscalPivot #GermanEconomy #InvestmentOpportunities

The #UnionBudget 2026-27 underscores the Government’s commitment to long-term growth while maintaining fiscal discipline and improving the quality of public expenditure, I write in today's The Economic Times.   I congratulate the Finance Minister Nirmala Sitharaman for presenting a balanced Budget that offers a prudent and forward-looking roadmap for enhancing India's competitiveness and self-reliance through a targeted policy support for strategic and future-growth sectors.   At a broader level, an additional Rs1.26 lakh crore allocation to #capitalexpenditure signals a clear growth orientation. In sectors, incentives for #nuclearpower aim to lower capital costs, strengthen energy security, and advance #decarbonisation. Measures for #datacentres and the expansion of the India #Semiconductor Mission are designed to attract global investment. The proposal to develop #RareEarth Corridors addresses critical supply chain vulnerabilities in a geopolitically critical sector.   The Budget also strengthens India’s position as a global services hub through incentives for Global Capability Centres (#GCCs) while enhancing tax certainty for IT services. Support for #MSMEs, including a proposed Rs10,000 crore #SME Growth Fund, will further safeguard the interest of small businesses. Most importantly, despite lower-than-expected #tax revenues in FY26, the Budget stays firmly on the fiscal consolidation path, adopts conservative revenue assumptions, and aims to reduce the share of revenue expenditure (excluding interest).  https://lnkd.in/gxwSJ-iq

💪The US Government Has Played A Big Part In Keeping The Economy Out Of Recession One big reason why the American economy has stayed strong despite rising interest rates is government spending. The US government has boosted growth and jobs by injecting a massive $5 trillion into the mix in the past four years – an unprecedented amount that equates to roughly 20% of the size of the overall economy. A big chunk of that cash – around $225 billion – went toward construction in the manufacturing sector, more than double what was being spent there before the Federal Reserve (Fed) began aggressively hiking interest rates to try to tame the country’s red-hot inflation. And, look, each dollar spent in this way doesn’t simply add a dollar to the economy – it multiplies through the supply chain – adding new jobs, increasing incomes, and boosting household spending. This ripple effect from manufacturing investment has supercharged overall economic output, more than making up for the inevitable drag created by higher interest rates. Now inflation in the US is cooling and the output is still rising, so it looks like the strategy has paid off. But there's a downside here too: a bigger deficit could lead to more debt problems, pushing up inflation and interest rates. And if the Fed moves too quickly or too aggressively in bringing interest rates lower – in effect, stimulating the economy too much – we could see inflation rise sharply again. But one thing’s clear: it’s not all about central bank moves anymore – government spending policies are playing an increasingly important role in driving big-picture economic forces, and are worth your attention. As I've warned before, we're entering an era of fiscal dominance. > Finimize #fiscalstimulus #debt #fiscaldominance

The Office for Budget Responsibility has just released its report on the UK’s public finances. The Fiscal risks and sustainability report highlights that UK debt is set to exceed 270% of GDP by the early 2070s. That’s largely due to longer-term demographic pressures of an ageing population, with rising healthcare and age-related expenses, it says. Echoing Karen Ward. While global economic shocks like the Covid-19 pandemic and the energy crisis have played a major role, the UK economy has been particularly hard hit due to relatively generous support measures for businesses and households, as well as policy reversals on fiscal consolidation. The OBR criticises domestic policy: “Planned tax rises have been reversed, and, more significantly, planned spending reductions have been abandoned. The more persistent fiscal deficits and ratcheting up of debt that resulted have been accommodated by successive loosening of the fiscal rules.”

The U.S. is quietly entering uncharted fiscal territory. Interest payments on federal debt are projected to reach 5% of GDP—the highest of any major economy and a level not seen in modern U.S. history. As shown in the second chart, this burden has accelerated dramatically in just the past few years. Unlike Japan or Europe, the U.S. isn’t running this cost alongside significant domestic savings or primary surpluses. Instead, we are layering higher debt service on top of persistent deficits, entitlement growth, and aging infrastructure—all while defense and geopolitical spending are increasing. What’s the likely policy response? History offers a clear pattern: • Loose monetary policy (to reduce real borrowing costs), and • Avoidance of fiscal tightening (to delay hard political choices). But this comes with a cost: a weaker dollar and diminished purchasing power over time. We’ve seen this movie before—1970s stagflation, post-war currency corrections, and the 2000s twin deficit concerns. The bottom line: If interest expense continues climbing past 5% of GDP without structural reform, it could force a reckoning—not just for markets, but for the credibility of U.S. fiscal stewardship.