Fiscal forward guidance needed

The US handling of the covid pandemic continues to be our main focus. Some states which have rolled back on some of their reopening measures were experiencing a re-deceleration in the number of cases in the course of last week, but a record number of cases on Sunday in Florida suggests more effort is needed. The number of casualties has started to re-accelerate. This is likely to add to public opinion awareness of the magnitude of the crisis. The Q3 rebound is definitely being dented.
The covid crisis is of course affecting the presidential elections, but although the national average of polls has been giving Joe Biden a steady lead of about 9 points since mid-June, the November race is far from “done and dusted”.
Joe Biden made his first “big speech on the economy” last Thursday. As we suggested in Macrocast a few weeks ago, those who hope that a post-Trump America would seamlessly return to unbridled free trade may be disappointed. “Buy American” was central to the Democratic candidate’s pitch. But maybe more fundamentally, whoever is the next US President will have to navigate a complex situation, offering enough accommodation after the emergency package to help the mechanical post-lockdown rebound turn into a proper recovery, as well as respond to a profound change in public opinion in favour of more economic protection from the government, while  laying the ground for a sustainable public debt trajectory which cannot count on eternal monetary policy forbearance.
The electoral calendar makes the issue more pressing in the US, but all governments will have to face complex equations. We think that, ideally, fiscal authorities should engage in “forward guidance”, that is provide economic agents with an explicit – albeit flexible – sequence for the fiscal stance across the next three to five years.  We think explicitly making fiscal consolidation dependent on progress towards closing the “output gap” could be the right pathway, allowing sustained support to the economy at a time of need while keeping investors “on board”, reassuring them against risks of “runaway policies”. This will be dependent on swift cooperation between governments and central banks though.