Fiscal Space in the Post-Pandemic Era: How Much Room Do Governments Have Left?

Revenue Policy in the Consolidation Mix

Sustainable fiscal consolidation is easier to achieve through revenue measures than through expenditure cuts alone, because revenue increases are less likely to trigger the immediate demand contraction that spending cuts produce. Broadening tax bases — reducing exemptions, closing avoidance channels, extending consumption taxes to digital services — can generate significant additional revenue without raising marginal rates. Several economies have pursued this route with measurable success.

The global minimum corporate tax agreement of 15%, agreed under OECD auspices and coming into effect across participating countries, represents one example of coordinated revenue action. By reducing the incentive for profit-shifting to low-tax jurisdictions, it modestly broadens the tax base for all participating governments. The IMF has estimated this could generate meaningful additional revenues for higher-income countries, though implementation remains uneven across jurisdictions.

Wealth and capital income taxation has attracted renewed policy attention in several advanced economies as governments look for revenue that does not fall on labour or consumption. The economic evidence on optimal capital tax rates is contested, but the political pressure to ensure that those who benefited most from the decade of low rates and rising asset prices contribute more to fiscal consolidation is real and growing across most major democracies.

The Emerging Market Problem

For many emerging market and developing economies, reduced fiscal space is an immediate constraint rather than a medium-term concern. Borrowing costs have risen sharply as global interest rates increased. Dollar-denominated debt has become more expensive as the US dollar remained strong. Revenue growth has slowed alongside weaker global trade.

The World Bank's January 2025 Global Economic Prospects flagged a growing number of low-income countries now spending more on interest payments than on health or education combined. That is not a sustainable fiscal position — and when it becomes untenable, the adjustment arrives suddenly in the form of a debt crisis that sets back development by a decade or more. The international community's frameworks for debt treatment have been slow and have not provided the rapid restructuring that several heavily indebted economies require.

The Takeaway

Fiscal space is the difference between a government that can respond when something goes wrong and one that cannot. The pandemic spending was necessary — the governments that spent freely in 2020 made the right call under extraordinary circumstances. But the world has not stopped generating crises. Building fiscal buffers back — carefully, without triggering the recessionary spiral that aggressive austerity invites — is among the most consequential and underappreciated policy challenges of the coming decade. The governments that manage this transition well will enter the next crisis with choices. Those that do not will be forced to watch it unfold without the means to respond.