By Mariana Mazzucato and Anna Hope Emerson
October 26, 2026
In capitals across the globe, the rhetoric of constraint has become the dominant language of governance. From London to Washington, and from Brussels to Brasilia, policymakers frequently lament that they have "no room to act." As inequality fractures societies and the cost-of-living crisis erodes the middle class, the prevailing consensus remains anchored in the belief that fiscal space is a fixed, finite commodity. We are told, with rhythmic regularity, that the coffers are empty and that the state must retreat.
Yet, this perceived squeeze is largely self-imposed—a byproduct of an outdated economic orthodoxy that equates fiscal responsibility with the aggressive reduction of deficits and debt. This narrow focus ignores a fundamental truth: true fiscal responsibility is not about balancing a spreadsheet in the short term; it is about building an economy’s capacity to grow, innovate, withstand systemic shocks, and fulfill its social contract over the long horizon. When governments mistake austerity for prudence, they inadvertently hollow out the very foundations of prosperity.
The Illusion of Fiscal Space
The contemporary obsession with debt-to-GDP ratios has created a perverse incentive structure. In a weak economy, the reflexive response is to slash public spending to "restore confidence." However, as historical data consistently shows, this often backfires. When fiscal rules are applied blindly, public investment—the primary engine of future growth—is almost always the first item on the chopping block.
The Paradox of Austerity
When a state reduces spending during a downturn, it drains demand from the economy, leading to lower tax revenues and further economic contraction. Consequently, the debt-to-GDP ratio often rises rather than falls. This is the "austerity trap." By prioritizing the appearance of fiscal discipline over the substance of economic development, governments are effectively dismantling the state’s ability to intervene when the next crisis arrives.
Redefining Ownership and Control
As more governments begin to recognize the necessity of reclaiming public control over economic outcomes, a critical debate has emerged: what does "control" actually mean? Does it mean the state must own the means of production? Does it mean nationalization, or something more nuanced?
The answer lies not in a binary choice between state ownership and the free market, but in the state’s capacity to steer economic activity toward strategic objectives. It is about "mission-oriented" governance—shaping markets to solve societal problems, from climate change and public health to the digital divide.
A Chronology of the Fiscal Pivot
To understand how we reached this point of paralysis, we must look at the evolution of economic policy over the last two decades.
- 2008–2010: The Financial Crisis Response: The initial response to the Global Financial Crisis involved massive fiscal stimulus, which saved the global financial system. However, this was quickly followed by a pivot toward "fiscal consolidation" or austerity, which stalled recovery in many G7 nations for nearly a decade.
- 2015–2019: The Pre-Pandemic Stagnation: During this period, central banks held interest rates near zero, yet public investment remained muted. The "low-growth, low-inflation" trap became the defining feature of the era.
- 2020–2022: The Pandemic Exceptionalism: The COVID-19 pandemic shattered the fiscal rules. Governments across the globe deployed unprecedented liquidity to sustain households and businesses, proving that "fiscal space" is a political choice rather than a mathematical constraint.
- 2023–2026: The Return to Rules: Following the pandemic, the inflation spike of 2023-2024 triggered a global rush to return to pre-2020 fiscal targets. This "return to normalcy" has paradoxically weakened the resilience of economies just as geopolitical and environmental pressures are mounting.
Supporting Data: The Cost of Underinvestment
The data on public investment trends over the last decade provides a stark warning. According to recent OECD analysis, public investment as a percentage of GDP in many advanced economies has remained stagnant or declined.
| Period | Avg. Public Investment (% of GDP) | GDP Growth Rate (Advanced Economies) |
|---|---|---|
| 2000–2007 | 3.8% | 2.7% |
| 2010–2019 | 2.9% | 1.9% |
| 2024–2026 | 2.7% | 1.4% |
These figures correlate strongly with declining labor productivity. When states stop investing in education, research and development, and infrastructure, the private sector loses the "crowding-in" effect that public investment historically provides. The state is not just a regulator; it is a co-creator of value. When the state stops investing, the engine of innovation sputters.
Official Responses and the Shifting Policy Landscape
The international community is currently divided on the path forward.
The Conservative Perspective
Treasury departments in several major economies continue to advocate for the "Fiscal Responsibility Act" models, arguing that high debt levels threaten sovereign credit ratings and crowd out private investment. Their response to critics is that the state should act as a "referee" rather than a "player," focusing on reducing debt to ensure that markets can allocate capital efficiently.
The Mission-Oriented Perspective
In contrast, a growing number of economists and policy advisors are pushing for a "New Fiscal Framework." This approach argues that public spending should be assessed based on its multiplier effect—how much private investment it triggers—rather than its impact on the deficit.
"We need to move away from the idea that the state is a business that must balance its books every quarter," says one senior policy advisor at the European Commission. "The state is an investor that must ensure the long-term sustainability of the system. If we don’t invest in the green transition now, the cost of climate-related disasters will dwarf any savings we make by cutting budgets today."
The Implications: A New Social Contract
If governments continue to prioritize deficit reduction over strategic investment, the implications are severe. We are likely to see:
- Increased Inequality: Without state-led investment in public services, the gap between those who can afford private solutions and those who rely on public ones will widen, fueling social unrest.
- Structural Fragility: Economies will remain ill-equipped to handle the next supply chain shock or health crisis, as the "just-in-time" philosophy of fiscal management leaves no room for "just-in-case" resilience.
- Loss of Democratic Legitimacy: When citizens feel that their government has no power to improve their standard of living, they turn toward populist alternatives, further destabilizing the political order.
The Path Forward: Steering, Not Just Spending
The challenge is not merely to spend more, but to spend better. Governments must develop the internal capacity to steer economic activity. This requires:
- Conditional Funding: Public subsidies to corporations should be tied to clear social outcomes—such as job creation, R&D investment, and decarbonization—ensuring that the public receives a share of the value created.
- Dynamic Public Procurement: Using the state’s massive purchasing power to create demand for new, sustainable technologies.
- Institutional Reform: Changing the mandate of public financial institutions to prioritize long-term value creation over short-term financial returns.
Conclusion
The "fiscal squeeze" is a choice, not a law of physics. If we continue to view the state as an impediment to economic growth, we will continue to suffer the consequences of stagnation and instability. However, if we recognize the state as the primary architect of the common good, we can reshape our economic framework.
What ultimately matters is not the level of debt, but the quality of the economy we are building. The task for the next decade is to transform the state into a capable, mission-oriented partner that drives growth, fosters equity, and addresses the existential challenges of our time. It is time to abandon the deficit trap and reclaim the power to steer our collective future.
