Goldman Sachs: World is entering new era of ‘bigger government’ and ‘higher taxes’

The world economy is entering an era of “bigger government” and “higher taxes,” according to a top Wall Street bank.

The scaling back of red tape and stronger corporate profits that characterised the global business environment since the 1980s is set to reverse, Goldman Sachs has said.

Supply-side reforms pushed through by former British prime minister Margaret Thatcher and US president Ronald Reagan – including retrenching government intervention in markets – are likely to unwind during the next economic cycle.

An easing in geopolitical tensions that culminated with the fall of the Berlin Wall, accompanied by nations pursuing less protectionist policies, boosted world trade growth and company profits over the last four decades.

However, the global economic order is hurtling toward a “post-modern” reset, triggered by the pandemic, the transition to net-zero and Russia’s invasion of Ukraine, the investment bank said.

“Just as the 1970s saw an era of national champions… so we are moving into an era of regional champions” to promote energy security and the transition to net-zero, Goldman said.

Households and businesses will have to shoulder higher taxes to fund the state’s larger role in markets.

The UK’s tax burden is on course to swell to its highest level since the late 1940s when Clement Attlee’s post-war Labour government was in power, according to Britain’s official forecaster the Office for Budget Responsibility.

Shifting manufacturing from the west to China to tap into cheaper worker costs had kept a lid on inflation in the latest economic cycle.

An abundance of “cheap and plentiful energy and labour” afforded central banks more room to keep interest rates low, Goldman added.

But, the severe supply shock engineered by the Covid-19 crisis and the Russia-Ukraine war changing the terms of trade will result in “this cycle… be[ing] more inflationary,” the investment banks said.

The world’s top central banks, including the US Federal Reserve, Bank of England and European Central Bank will have to respond to prices rising above their targets by reining in accommodative monetary policy that has characterised the global economy since the financial crisis.

Corporate profits will be weaker due to elevated inflation, Goldman warned.