Fiscal Impulse Over Interest

For decades, the central banker was the undisputed protagonist of economic policy. If growth slowed, they lowered interest rates; if inflation threatened, they raised them. But that script is quietly being rewritten.

Today, government spending is increasingly stealing the show, replacing monetary levers as the true engine of economic momentum. This shift into what economists call 'fiscal dominance' turns the traditional hierarchy on its head. Instead of central banks setting the economic weather, they find themselves increasingly constrained by the borrowing needs of the state. Raise interest rates too aggressively to fight inflation, and you risk destabilizing government finances. Under this pressure, central banks may be forced to keep rates lower than the economic conditions actually warrant.

Governments are no longer waiting for monetary policy to gently nudge the dials. Instead, they are deploying targeted fiscal stimulus—like the US CHIPS Act and the Inflation Reduction Act—to directly offset the drag of high interest rates, propping up sensitive areas like construction. Meanwhile, the world's major economies are locked in an escalatory cycle of subsidy-driven industrial policy, pouring money into targeted sectors despite ballooning public debt and tightening fiscal conditions.

Not all spending pulls its weight equally. Infrastructure investment, for instance, boasts a muscular fiscal multiplier, estimated at around 1.5 over a multi-year horizon. Yet even that comes with friction; implementation lags and crowding-out effects mean certain projects can paradoxically drag on short-term GDP.

This new era leaves a lingering question. The long-term inflationary toll of sustained fiscal dominance remains an open debate, tethered entirely to whether the markets actually trust the fiscal authorities. When the state takes the steering wheel from the central bank, the ride gets a lot less predictable.