Like many developed economies, Britain faces a paradox: it has too many fiscal rules and too little purpose. Its fiscal watchdog keeps an eye on the numbers, but no one is keeping an eye on growth. Innovation has become a slogan, not a strategy. Institutions designed to ensure prudence have become an obstacle to progress.Chancellor of the Exchequer Rachel Reeves’s self-imposed fiscal constraints illustrate the larger problem. They will deter productive investment, especially in innovation, even though increasing government borrowing to fund public research and development would not break the rules.Making matters worse, the Office for Budget Responsibility (OBR), the country’s fiscal watchdog, clings to implausible assumptions about productivity trends, while overlooking what the recipients of this year’s Nobel Prize in Economics (Philippe Aghion, Peter Howitt, and Joel Mokyr) have shown: disruptive innovation, properly nurtured, is the wellspring of long-term prosperity.Despite all the recent commentary about the “fiscal hole” created by the OBR’s upcoming productivity downgrade, few have noticed a larger problem. The OBR is assuming that the effects of most government policies on productivity vanish after five years. That is simply indefensible.Recent evidence from the US shows that government spending can have both significant and persistent effects on output and productivity. When governments invest in R&D or infrastructure, the economic gains are realised not over quarters or even electoral cycles, but over decades.The OBR’s short horizon reflects a deeper error. Productivity is treated as an external, policy-independent trend – in keeping with what economists call an exogenous growth model – implying that innovation, education, and R&D appear as residuals of progress, not as its engines. But Aghion and Howitt’s endogenous growth theory has overturned this view, demonstrating that productivity is shaped by policy, institutions, and ideas.The OBR’s assumption that fiscal policy’s impact on productivity fades after five years effectively erases the link between government investment, innovation, and long-term growth. Yet as Mariana Mazzucato and William Janeway point out, many of the technologies that have defined the modern economy – from semiconductors to the internet – were seeded by public investment in basic research, later amplified by private enterprise.A country whose policymakers rely on models that assume away innovation cannot hope to achieve it. Britain’s challenge is not fiscal capacity but institutional imagination. My own recent empirical work on the US quantifies the macroeconomic returns to public and private R&D investment, which can be used to generate productivity projections within a framework analogous to that used by the OBR. My co-authors and I find that a permanent 1% increase in R&D investment in the whole economy raises productivity (and thus GDP) by about 0.18% over a decade.Moreover, our estimates suggest that, in Britain’s case, £1 ($1.32) of additional public R&D investment crowds in between £0.57-1.03 of additional private R&D. So, to achieve a 1% increase in R&D investment for the whole UK economy, public R&D expenditure would have to increase by £360-460mn per year, a rise of 2-2.6%.These findings demonstrate that public spending on innovation generates durable productivity gains well beyond the five-year horizon embedded in the OBR’s models. And other research has reported similar findings for the US and for the UK.For its part, the Congressional Budget Office, the American equivalent of the OBR, has embraced Aghion and Howitt’s model, stating that:“In contrast with the national income accounting approach and on the basis of published studies of the US economy, CBO estimates that an additional dollar’s worth of infrastructure capital increases real potential (maximum sustainable) GDP by 12.4 cents, on average... Increases in federal spending on physical infrastructure, research and development, or education would boost private-sector TFP [total factor productivity] in the coming decades, contributing to economic growth that could lower the budgetary cost of that spending.”Ignoring the long-run effects of both government-funded and privately funded innovation leads to systematic underestimation of potential output and fiscal headroom. A fiscal “hole” can appear or disappear not because policy has changed, but because one’s assumption about productivity has. This is not fiscal discipline; it is a fiscal illusion. Britain’s institutions, designed for prudence, have become prisoners of their own short-term calculus.To restore credibility and a sense of purpose, the OBR’s independence must be matched by intellectual openness. One reform would be to establish an independent rotating panel of academic experts in macroeconomics and public finance who review the OBR’s framework every five years or so and issue methodological recommendations. Transparency about modelling choices is as vital as transparency about fiscal data.A separate but complementary reform concerns how the OBR communicates uncertainty. At present, it focuses on a single point estimate of future potential output, which then immediately becomes a numerical constraint on how much the government can spend. This approach mistakes precision for prudence. A better method would be to mirror the way the Bank of England conducts and communicates monetary policy, namely with fan charts that show a range of possible productivity, output, and debt-to-GDP paths over a ten-year horizon.Under this reformed fiscal framework, the government should be required to act only when current or proposed policies are projected to push fiscal sustainability outside the guided ranges. In other words, fiscal policy should respond to genuine risks, not to decimal-point revisions.The power of public policy to raise productivity may be difficult to quantify, but it is real. If Britain wants to recover a spirit of enterprise, it must escape the tyranny of short-horizon policymakers who are constrained by the next fiscal event. Prosperity will not come from ever finer rules or ever gloomier forecasts. It will come from the courage to invest, to innovate, and to imagine again what Britain can achieve. A country that guards only its guardians risks guarding nothing at all. – Project Syndicate Paolo Surico is Professor of Economics at London Business School.

The world is on the cusp of a profound geopolitical restructuring, as escalating great-power rivalries erode the multilateral structures that have supported the global order since the mid-20th century.To prevent the international system from sliding into chaos and conflict, those unwilling to accept a world governed solely by raw power must find ways to reinforce today’s debilitated multilateral institutions through informal arrangements and bilateral agreements.From the end of World War II to the early 2010s, multilateralism provided the framework for international co-operation. Though imperfect and often inconsistent, it was the most effective model of global governance ever created. But after more than a decade of continuous erosion, it is clear that the multilateral system as we know it can no longer facilitate collective action.Without a framework capable of coordinating relations among countries, the alternatives are stark: a world government – an unfeasible prospect – or a steady drift toward anarchy. Multilateralism emerged as the pragmatic middle ground: collective decision-making and binding rules, rather than a single global authority or none at all.Born of unique historical circumstances, this model took shape as the United States – the dominant postwar global power – promoted a treaty-based system guided by enlightened self-interest. That vision was realised at the Bretton Woods and San Francisco conferences, which led to the establishment of the United Nations, the International Monetary Fund, the World Bank, and the General Agreement on Tariffs and Trade, as well as its successor, the World Trade Organisation.In principle, if not always in practice, these multilateral institutions were open to all countries, with bodies like the WTO and the International Civil Aviation Organisation providing a shared framework of rules, standards, and responsibilities. But in recent years, they have been severely undermined by the rise of sovereigntism in developed economies like the US and in emerging powers like China.The US, for its part, played a significant role in weakening the very institutions it helped create. The 2003 invasion of Iraq and its intervention in Libya’s civil war in 2011 showed that the world’s major powers did not see themselves as bound by the so-called rules-based international order. This trend was reinforced by US President Donald Trump’s election in 2016, while his return to office in 2025 represented an explicit repudiation of the multilateral approach.Meanwhile, Russia and China have been eager to undermine a system they view as detrimental to their interests. Russia’s 2008 invasion of Georgia and invasions of Ukraine in 2014 and 2022 openly defied international law, bringing large-scale war back to Europe. Likewise, China’s “Made in China 2025” industrial strategy violates WTO rules, and its aggressive actions in the South China Sea show complete disregard for the 2016 arbitral ruling that rejected its expansive maritime claims.The consequences are now widely evident: on the issues that matter most, multilateral institutions no longer drive global decision-making. Paralysed by cross-vetoes among its permanent members, the UN Security Council has been largely inactive, with the notable exception of its recent endorsement of Trump’s Gaza peace plan. At the same time, the WTO – whose establishment in 1995 was multilateralism’s last meaningful achievement – can no longer enforce its own rules since the US rendered its appellate inquorate in 2019.This institutional paralysis is part of a broader trend. No major multilateral institution has been created in decades, while informal arrangements – lacking binding rules and often involving non-state actors – have proliferated, offering more agile and adaptable forms of coordination better suited to an increasingly fragmented world. Today, multilateral institutions account for only one-quarter of the global governance ecosystem.In this environment, preventing the disintegration of the international order is a daunting task. What is needed are intermediate mechanisms that do not depend on universal participation or the adoption of comprehensive, binding rules. While achieving global consensus is virtually impossible, informal alliances, public-private platforms, and flexible coordination mechanisms can help mitigate geopolitical risks.Gavi, the Vaccine Alliance – which has immunised over one billion children since 2000 – offers a useful model, as do the Institute of Electrical and Electronics Engineers, with its globally accepted technical standards (including Wi-Fi), and the International Organisation for Standardisation (ISO). Although lacking legal authority, these bodies have achieved technical legitimacy and broad voluntary compliance. Once secondary to multilateral institutions, they may now emerge as pillars of global co-ordination.As private actors, subnational governments, academic institutions, and professional networks continue to gain influence, diplomacy is no longer the exclusive domain of foreign ministries. Global governance, in turn, is becoming increasingly decentralised, especially in critical areas like cybersecurity.To avert a global catastrophe, today’s institutional vacuum must be filled by flexible, workable arrangements: less formal, less universal, and less binding, yet still capable of facilitating co-operation among countries and key actors. These include public-private partnerships, interregional agreements such as the EU-Mercosur trade deal, and “coalitions of the willing” like the Just Energy Transition Partnerships.Admittedly, this approach involves higher transaction costs and cannot guarantee certainty or uniformity. But the task facing international policymakers is not to design the perfect model – it is to identify the one that is most viable in a rapidly changing world teetering on the edge of systemic collapse. — Project SyndicateJavier Solana, a former EU high representative for foreign affairs and security policy, secretary-general of Nato, and foreign minister of Spain, is President of EsadeGeo – Center for Global Economy and Geopolitics.Angel Saz-Carranza is Director of EsadeGeo – Center for Global Economy and Geopolitics and Professor of Strategy and Policy at Esade.