During the opening of the summit of Group of 20 finance ministers and central bank governors on Oct. 12, 2022, I warned that the world is facing increasing and compounding risks from high inflation, weak growth, energy and food insecurity, climate change, geopolitical fragmentation and rising debt distress. Low-income countries will bear the highest burden, but also middle-income and even advanced economies face the prospect of substantial pain.

The global economy has been heading into a perfect storm. The COVID-19 pandemic has left scars on all our economies, precipitating a drop in aggregate demand and then aggregate supply. The symptoms are similar to those of a “liquidity trap,” with third-party funding in the financial sector remaining high while the real economy stagnates. To solve this problem, the great 20th-century economist John Maynard Keynes proposed countercyclical fiscal policy. If the economy works well, the annual budget deficit should be reined in; but if the economy is slowing, deficits should be permitted to grow.

Indonesia, under a 2003 law, disciplined its fiscal policy by limiting annual budget deficits to less than 3% of GDP, and total public debt to 60% (using the same parameters as the European Union’s Stability and Growth Pact). But when COVID-19 caused the economy to contract, the annual budget deficit was expected to rise above 3% of GDP to create room for stimulus. To enable that flexibility, the government waived the budget-deficit limit.