The General Relativity of Fiscal Space

Scrutinising the real limits to government spending.

Highlights

• Examines competing paradigms of fiscal space—limits to government spending—across historical and contemporary literature to address urgent socio-economic challenges. 

• Defines three theories of fiscal space: 

  • Absolute (Newtonian): based solely on tax and bond revenues—exogenous ("sound") finance paradigm.

  • Relative (Special): linked to demand (resource under-utilisation and inflation)—endogenous (Keynesian) finance paradigm.

  • Relative (General): incorporates both demand (resource under-utilisation and inflation) and supply factors (monetary sovereignty and productive capacity)—functional finance paradigm.

• Develops a novel Fiscal Space Index for 150 countries, grounded in the general relativity principle, integrating four components including a custom-built Monetary Sovereignty Index. 

• Reveals wide cross-country and intra-regional variation in fiscal space, with many nations having more room for policy action than typically assumed. 

• Simulates macroeconomic outcomes under different paradigms, highlighting the superior coherence of the functional finance framework. 

• Analyses institutional constraints and proposes reforms to the international monetary system to enhance progress toward sustainable development goals.