Governments are on the front lines with managing their stimulus packages.
World leaders responded to the financial meltdown with complex, multifaceted plans and stimulus packages in an attempt to keep their economies afloat. Sound leadership is now required to drive efficiencies and to reduce spending while protecting core public services.
Although there are still many unknowns about the effect of government action on the crisis, we believe there are three important lessons that can be drawn from the event:
- Stimulus programs need to be administered carefully and transparently to help rebuild public trust and confidence.
- High debt levels mean governments cannot easily return to business as usual.
- A bold reform agenda could turn the crisis into an advantage.
House in order
Recent experience suggests that stimulus programs carry two basic risks:
- There may be unintended consequences. Almost two-thirds of plans were geared toward boosting short-term demand. Consequently, many were entered into without time for the rigorous cost-benefit assessments that would be undertaken in normal circumstances.
- Faulty execution of the program. Recent developments have demonstrated just how important it is, particularly in a time of crisis, for governments to effectively manage their own costs, verify that proper controls are in place and maintain high standards of governance and transparency. If they are to lead their constituents through these difficult times, leaders must first put their own houses in order.
In fact, the quality of a program’s execution is the only variable of a recovery program under a government’s control. Fortunately, it may also be the single most crucial element of successful crisis management.
Very few macroeconomic programs can function without the confidence of the public, and the public’s trust can be earned only by a government that has a reputation for fulfilling its commitments.
Thrust into a role in which they served not just as market regulators but as the lenders and even buyers of last resort, many governments acted with impressive resolve. But they haven’t been as successful in acting transparently and in building consensus around their actions.
This has placed substantial pressure on governments, which are now being asked to clear away the private sector car crash, then provide the fuel and the GPS for a route back to economic growth.
This will make the task all the harder over the next few years. Today, even as governments continue supporting the global economy, they must keep public deficits and debt under control so that the private sector will become self-sustaining once more.
To do that will require not just expertise in financial management, but a new approach to governance.
