Budgeting for existential crisis: The federal government as society's guarantor

Abstract

Onset of the coronavirus disease 2019 pandemic produced a fiscal shock of almost unprecedented scale and suddenness. Procedurally, the exigencies of responding to such crises make a mockery of the apparatus of normal budgeting. Standard near-term constraints and targets for fiscal choice lose utility as guides for budgeters;extraordinary procedures are invoked. Assessing the initial fiscal response reveals the extraordinary role the federal government plays during such a period as ultimate guarantor of the economy and social order. The federal government has constitutional responsibility and, under duress, is the only set of institutions with the capacity to play this role. Federal responses to ordinary emergencies generally assess their contribution to relief and recovery. In an extraordinary emergency such as the pandemic, responses may be assessed for their contributions to two additional policy objectives: readiness and resilience. An event of this magnitude also offers an opportunity to reconsider the aims of fiscal policies and whether the terms for measuring and judging policy outcomes are appropriate for such a period. The standard budget baseline lacks a component for the average multiyear cost of the federal government's exercise of its role as societal guarantor. The standard metric for judging fiscal policy-public debt as a percent of gross domestic product-is problematic as a fiscal policy target. An alternative would capture changes in public sector net worth, highlighting the net fiscal and economic benefit or cost of any policy to borrow in order to invest in long-term policy objectives. Applications for Practice The framework provided here can be used to assess the unfolding budget responses to crisis and how those responses are affected by procedures used to develop and execute the federal budget, addressing such questions as: Whether costs arising from the federal government's broad responsibility for social order in severe crises should be recognized in the budget baseline and reserved in the budget as they arise, that is, as an estimate of the average annual cost of the government's role as societal guarantor. Whether the budget horizon should be extended and whether decisions should be organized around major policy objectives, including readiness and resilience, to encourage more strategic responses. To what extent the budget process should privilege investment in public assets that build readiness and resilience and thus sustain fiscal capacity to meet current commitments and future shocks. (Because of uncertainty, budgeters cannot predict returns for any specific investment or investment category. It follows that they need a budgetary strategy that maximizes average net returns from a broadly diversified investment portfolio-a classic strategy to cope with uncertainty. This implies purchasing a broad set of options that may be exercised in the future to either [1] capture for the public the large returns on investments that pay off [opportunity options] or [2] hedge against disruptive, even catastrophic events that generate large losses [insurance options] [Redburn, 2015, 12]). Whether traditional targets of fiscal policy-deficits and debt to gross domestic product ratios-should be augmented or replaced by metrics that capture changes in public net worth, thus recognizing ongoing creation of public assets as well as accruing commitments in the primary target for fiscal policies.