COVID-19 temporarily re-made fiscal politics. States responded to the health threat by enacting a sudden and far-reaching contraction of the private sector, partly compensated by an unprecedented expansion of the public sector. The moves proved temporary, with a swift return to fiscal and monetary constraint. However, the COVID response potentially provides lessons for understanding broader changes in capitalism.
In part I of our post, we used Schumpeter’s theory of the tax state to trace how changes in the organisation of capitalism had their ‘fiscal reflection’ in changing fiscal accounting practices. In this part II of our discussion of the tax state, based on a journal article recently published in Critical Perspectives on Accounting, we identify a new set of ‘hybrid’ fiscal tools, built prior to, but used during COVID, that could point to a more enduring shift in fiscal politics beyond neoliberalism.
The financialised state
Critical accounting scholarship reveals how the financialisation of capitalism in the neoliberal era was mutually constituted by the financialisation of accounting standards and practices. Key here were changes to financial accounting standards, in particular the emphasis on fair value accounting for asset values, originally designed to account for the value of assets such as financial derivatives on corporate balance sheets, that then filtered through to the corporate accounting rules adopted by states. Fiscal activities were increasingly shifted from conventional fiscal accounts using ‘off budget’ and ‘off balance sheet’ techniques such as loan guarantees and special entities.
The financialisation of the state effected a shift from Keynesian models of managing the social risks of the present, to new forms of governance and fiscal tools that are focused on managing future financial risks. While the former was focused on labour market incomes in order to manage aggregate demand, the emphasis of the latter is on liquidity in order to manage the solvency of indebted households. Reflecting the key metric of private finance, the management of risk, especially in times of crisis, is now central to how states maintain both legitimacy and accumulation.
The financialisation of the state is contested. Ongoing demands for social and environmental protection, we argue, have given rise to forms of what we term ‘fiscal hybridity’. Hybridity refers to combining state and market forms of economic integration. New financial modes of governing citizens and the economy are hybrid when they combine distinctive elements of public (redistribution) and private (contract) finance. Rather than subsuming public finance into private finance in the imagined neoliberal model, fiscal hybridity responds to the practical constraints of neoliberalism by finding ways to exercise fiscal power through the categories of private finance. Fiscal hybridity is often a pragmatic or technocratic response to real political economic pressures, such as democratic politics and economic crises, like that which coalesced with COVID-19. Such pressures make fiscal austerity untenable, forcing state actors, who cannot simply return to the Keynesian era, to create fiscal space in new ways.
In Part I, we showed how neoliberalism demanded the asymmetric application of capital accounting rules within the state, which facilitated state support for the accumulation of private (rather than its own) wealth. Fiscal hybridity maintains this orientation to wealth but reflects a reassertion of politics over how wealth should be governed. Fiscal hybridity increases fiscal discretion by asserting symmetry in the application of the capital accounting rules extended to states by neoliberal reformers. We identify three kinds of hybrid state action that operate through asset-based categories of private finance – as creditor, underwriter and investor – to explore how an emerging ‘asset state’ is expanding fiscal space.
State as creditor
States responded to COVID-19 by acting as a creditor for an economy facing a sudden and severe crisis. The fiscal response to the pandemic was notable for the extent to which it relied on off-budget measures designed to secure liquidity for banks, firms and households. These off-budget measures included ‘below-the-line’ equity injections, loans, asset purchases and debt assumptions, and contingent liabilities including loan guarantees and the ‘quasi-fiscal’ operations of special government entities.
In the US, questions about the role of the state as a creditor are playing out through ongoing debates, spurred on by COVID-19, about student loans. Changes in public budgeting rules from cash to accrual accounting facilitated the expansion of government student loan schemes, particularly in Anglophone university systems. The loans take the form of a debt for the student, but are issued by and ultimately repaid to the state, challenging the asymmetric focus on government as borrower under neoliberalism. The hybrid construction of student loans opens space for citizens to contest what kind of creditor the state should be.
The COVID-19 pandemic saw the Trump administration pause student debt repayments on federal loans, a policy significantly extended by the Biden administration. This signalled a shift away from treating student debt as a private contract, to something that is a tool of macroeconomic management and redistribution in a time of crisis and subject to democratic politics. The pause on loan repayments was an explicit fiscal response to the pandemic-induced crisis in the labour market, akin to the role played by more conventional automatic stabilisers. However, Biden’s student loan forgiveness plans have since been challenged by Republican-led states in the US Supreme Court, which have contested the authority of the Biden administration to uses its discretion as a creditor by restructuring the terms of debt through executive power.
State as underwriter
Second, COVID-19 witnessed an expansion and shift in the role of the state as underwriter of economic and social risk. Neoliberal budgeting facilitated the rise of ‘asset-based welfare’, by subsidising private asset, especially housing, ownership. The global financial crisis, however, revealed the limits of this model, not only for households whose wealth was threatened by a crisis in the housing market, but for a financial sector dependent on household debt repayments. States responded asymmetrically with bailouts for Wall Street while millions of homeowners faced foreclosure.
The onset of the pandemic witnessed a reorientation of the underwriter state in the vein of the hybrid fiscal model. States did not renege on their role as underwriter for capital. However, signs of a different kind of underwriter state also emerged that sought to extend liquidity support to households, countering the asymmetry of the financial crisis bailout model (though with continued inequalities in which households were bailed out).
As economies locked down, governments around the world enacted wage subsidies, increased unemployment benefit rates while reducing conditionality, and made other relatively universal cash payments to households. The US also allowed homeowners to suspend payments on federally backed mortgages, while in Australia the government negotiated mortgage repayment freezes and allowed access to superannuation.
Rather than stimulate demand, these measures primarily sought to underwrite the liquidity households needed to repay debts and remain solvent, or allow insolvent households to keep their assets, preventing the widespread delinquencies and foreclosures seen in the global financial crisis. These policies signal an emerging politics of who, what and how the state should underwrite, which has again emerged in debates over the nature of bailouts provided to troubled banks.
State as investor
Finally, contestation over post-COVID-19 ‘recovery’ centred on the role of the state as (social) investor. Neoliberal budget reforms created imperatives for states to manage public investment through private markets. Public-private partnership models conceal flows of (future) public money and the socialization of the risks faced by capital. Likewise, Social Impact Bonds effectively move current social spending off the headline budget in the state’s financialised accounts by contracting future public payments to private investors as a contingent liability.
Welfare state advocates have advanced a more symmetric application of balance sheet logics within the state, calling for a ‘social investment state’. Advocates reverse liability-based understandings of the costs of future public spending, and instead emphasise future fiscal returns from the welfare state, arising from higher tax revenues and avoided costs. This enables the care economy to be reframed in hybrid terms as social infrastructure that can be invested in to build public wealth. Rather than state as taxer-spender managing aggregate demand in the present, the state becomes a ‘social’ investor managing social value (wellbeing) over the long-term.
The Biden Administration’s COVID-19 recovery plans attempted to leverage the role of the state as social investor, though with only partial success. While the Inflation Reduction Act eventually stripped of most of the original social infrastructure ambitions, it included a series of significant climate measures that were justified and enacted through a social investment logic. Spending was organised through an expansion of access to tax credits: a hybrid, partly off-budget fiscal tool that effectively borrows from future tax revenue to expand (mostly private) investment in the present. The Biden Administration argued that the bill would ‘improve the long-term fiscal health of the Federal ledger’ by ‘reduc[ing] the future financial risks from climate change for the Federal Government and for taxpayers’.
A new fiscal politics?
Changes in the state’s ‘fiscal reflection’ potentially signal a broader change in the political economy. Keynesian tools are well suited to manage the business cycle of industrial production and the dominance of physical commodities to profitability. Asset-based logics not only reflect the advance of neoliberalism, but potentially respond to different democratic challenges associated with issues such as climate change, precarious work and housing inequalities. None of this suggests particular outcomes, rather it points to a different terrain, or statecraft, through which the tensions between political legitimacy and capitalist accumulation will play out.
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