The fiscal response to COVID-19 has been unprecedented, with governments around the world committing to massive spending to stabilize their economies. From the U.S. CARES Act to Germany’s substantial support package, these measures represent a big departure from the austerity-focused mindset that followed the 2008 financial crisis. Instead of cutting back to control deficits, governments are prioritizing economic relief, taking on debt to keep people spending, protect businesses, and save jobs during a time of major disruption.

This shift has sparked fresh discussions about fiscal multipliers, that is, how much government spending boosts economic activity. Early evidence suggests that direct aid to households and businesses, like stimulus checks and wage subsidies, has helped keep consumer spending alive even during strict lockdowns. By putting money directly into people’s hands, these measures have softened the economic blow and provided some much-needed stability. This shows how effective fiscal policy can be during a crisis, even though it’s leading to record-high public debt.

Of course, the sheer size of this spending has raised concerns about the long-term consequences, like how governments will handle growing debt and whether inflation might rise. As debt levels soar, some worry about how countries will manage repayments down the road. Others are concerned that as economies reopen, higher demand could outpace supply and push up prices. Right now, inflation remains low in many advanced economies, but if supply chains can’t keep up with demand, that could change. Policymakers are now walking a fine line between focusing on short-term recovery and managing potential risks for the future.

This situation has also brought Modern Monetary Theory into the spotlight. According to MMT, countries that control their own currencies can afford higher levels of deficit spending as long as inflation stays in check. With borrowing costs historically low, many governments are borrowing heavily to fund these stimulus programs, suggesting that deficit spending might not be as risky as once thought. Supporters of MMT argue that governments can focus on stability now and worry about debt later, as long as inflation and interest rates remain under control. Critics, however, caution that if inflation or borrowing costs rise unexpectedly, this strategy could backfire.

The large-scale fiscal measures in response to COVID-19 show a shift in how governments approach economic policy, emphasizing the importance of direct intervention during times of crisis. This new focus on bold fiscal action suggests that austerity might not be the best solution for economic downturns, especially in challenges of this scale. These real-world experiments are offering valuable lessons about the strengths and limits of fiscal policy, potentially reshaping economic thinking for the future.

As governments navigate this new era, they’re balancing short-term needs with long-term concerns. Right now, the priority is economic stability, but the question of how to manage debt in the future will become more pressing as recovery takes hold. This moment provides a chance for policymakers to rethink how government spending fits into economic management. It may mark a shift toward a more flexible, demand-driven approach, moving away from the rigid austerity of the past. How these fiscal strategies play out will shape the way governments handle spending, debt, and inflation in the years to come.