Do taxes need to rise to pay for our new debt?

Simon Wren-Lewis has a nice summary of a debate between Jonathon Portes and Bill Mitchell about whether we will need to raise taxes in order pay for the new debt accumulated during the pandemic or to pay for an expansion of public spending in order to pay for a variety of possible priorities.  The quick summary is that both agree we do not need to raise taxes to pay for the debt accumulated during the pandemic, that this debt should allowed to shrink as a share of GDP as economic growth continues over the next couple of decades, and does not need to be formally repaid by running surpluses for a long period of time.

Even if they agree on this point, they disagree whether an increase in public spending needs to be paid for with new taxes.  Jonathon Portes seems to think that over the medium term if we do not raise taxes to pay for it inflation will increase and it is better to raise taxes to avoid the higher inflation then to suffer through persistently higher interest rates.  Bill Mitchell seems to think new public investment will not raise inflation over the medium term so there is no need to raise taxes.  He does eventually admit that taxes might have to go up if public spending rises dramatically and inflation does rise, so there might not actually be much of a disagreement here.

Simon Wren-Lewis goes on, however, to make two key points.  First, he says we should wait to raise taxes until interest rates start going up.  If interest rates stay at zero, then there is no trade off between higher taxes and inflation or higher taxes and lower interest rates, and more fiscal stimulus is necessary to keep the economy at full employment.  It is only when interest rates rise above zero that we know it is safe to start withdrawing the fiscal stimulus, so this first point by Simon Wren Lewis is well taken.

Second, he argues that when interest rates are stuck at zero then fiscal stimulus should be the primary tool of macroeconomic stabilization.  This too seems kind of obvious.  Central banks usually use interest rates to do macroeconomic stabilization but when interest rates are stuck at zero that tool is no longer available.  Fiscal stimulus then remains the main tool available to fill in on that role, but what Simon Wren-Lewis does not do is suggest that perhaps central banks should be given some direct control over fiscal policy since institutionally legislative bodies are not well set up for this particular purpose.  Of course this has to be done incrementally with careful safeguards put in about the extent and duration of the stimulus, but the longer interest rates stay stuck at zero, the more seriously we need to consider this option.