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The Return of Fiscal Policy: From Austerity to Strategic State Activism

Research Paper 2 of The New Global Macroeconomic Regime: The Transformation of Fiscal Policy, Monetary Policy and Global Trade

Luca Bindi·24 July 2026·28 min read

For nearly three decades, fiscal policy was the junior partner in macroeconomic management, with independent, inflation-targeting central banks as the primary stabilisation tool. This paper argues that division of labour has broken down, and that fiscal policy has returned not as a temporary crisis response but as a structurally larger, more strategically directed instrument of economic policy. The Global Financial Crisis briefly restored fiscal policy to prominence before a pivot back to austerity; COVID-19 broke that pattern definitively, and the resulting fiscal posture has not reverted to pre-pandemic norms. What is emerging is not a return to twentieth-century Keynesian demand management but a new fiscal paradigm oriented toward long-run strategic state investment -- industrial policy, defence capacity, infrastructure, and technological competitiveness -- with first-order implications for debt sustainability, fiscal-monetary interaction, inflation, and financial markets.

Key Takeaways

Fiscal policy is returning not as temporary crisis response but as a structurally larger, strategically directed instrument -- the emerging paradigm differs fundamentally from twentieth-century Keynesian demand management.
The Global Financial Crisis produced a temporary fiscal expansion that was substantially unwound during the subsequent austerity era; COVID-19 broke that pattern, and fiscal positions have not reverted to pre-pandemic norms.
The new fiscal paradigm centres on long-run strategic investment -- industrial policy, defence, infrastructure, energy transition, AI infrastructure, critical minerals -- rather than primarily short-run demand management.
Conventional debt-to-GDP ratios increasingly understate fiscal sustainability risk; a fuller assessment requires the interest-growth differential, contingent liabilities, and the composition of spending between investment and current consumption.
Six long-term scenarios are proposed, from sustainable strategic investment to fiscal dominance and renewed austerity, developed further in Research Papers 6, 9, and 10 of this series.

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Sources

IMF Fiscal Monitor and World Economic Outlook, BIS, OECD, ECB, World Bank, European Commission, Federal Reserve, Bank of England, and peer-reviewed academic literature on fiscal policy — IMF / BIS / OECD / ECB / World Bank / European Commission / Federal Reserve / Bank of England

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