A decade after the late 2000s recession, much of the world is now back at the top of the economic cycle, and critically near the next crisis. At the top of an economic cycle, governments are collecting their peak tax revenues — yet even so, many are still running large fiscal deficits and have large existing public debts. This includes the United States, Canada, and the UK among others.

With public finances in such a precarious situation, when the next recession hits, policymakers will be presented with dwindling options. Tax cuts and stimulus will be challenging, as the appetite for bond purchases by investors and central banks have already been stretched to their limits. This may be attempted, but especially with turbulence in global trade (affecting the supply of goods) and years of quantitative easing (affecting the supply of money), inflationary pressures would be too high to tolerate. In fact, one could argue that the consumer price index has already dramatically understated inflation with increases mostly accumulating in the real estate market, making housing unaffordable. Further monetary easing or fiscal stimulus would simply accrue more gains to the real estate market, due to land & tax policy which incentivize locations to be poorly used, monopolized, and prohibitively expensive. This is the Henry George Theorem, which demonstrates how government spending increases land values by more than this expenditure. Furthermore, the build quality, architecture, and locations of real estate projects have left much to be desired. Central banks are analogous to the driver of a car, but with so much of the lending injecting fuel into consumption and land speculation instead of more viable investment, it’s as if we’ve had our foot on the gas pedal for 10 years but the engine is broken.

Raising tax rates presents yet still more problems. Capital (and perhaps labour) will either make efforts to avoid these taxes, or will outright flee. There will be less to tax, and tax increases will slow the economy. This will first be seen in the riskiest emerging markets that already run dual deficits and have no control over hot money inflows, such as Turkey and the Philippines (where we can expect a wave of defaults). Soon we will see that developed markets are not immune from outflows, depreciations, and bond sell-offs either. Raising taxes on capital or labour would worsen these problems in exactly that order, as well as both fiscal and current account deficits.

Years of debt-fueled consumption buoyed by a soon-to-be deflating real estate sector have left consumers stretched far too thin for a consumption-led recovery. Yet lending in many countries has skipped over investment in real production, which is where the monetary stimulus should have been flowing to all along. Poor tax policy has ensured that it did not.

What options will policymakers have to deal with the next crisis?

With government and consumer spending out of fuel, and no room for tax increases to plug the deficit (without tanking the economy), the first place policymakers will look, will be back to the central banks. However, with central banks already stretched as well, they will have to become increasingly creative to achieve the same stimulative effect as before. This might mean outright and unsterilized monetization of debt. Some countries might still have room for such policies (which ones exactly will soon become clearer), however the majority will not be able to do so without severe inflationary consequences. Furthermore, if so little of the previous rounds of monetary easing resulted in productive investment, and instead led to unsustainable consumption, inflated asset prices, and property speculation, then more of the same rate cuts and quantitative easing will result in the same cycle once again. That is of course unless tax (and governance) reform addresses this.

The next place policymakers will look, will be to smaller government, and perhaps the unloading of obligations onto local governments. Improved governing efficiency and the streamlining of bureaucracy are absolutely necessary. However, the best time to take such actions is when the economy is running hot, so that the private sector can absorb laid off public-sector workers. If there hasn’t been the political will to do so during times of growth, where will the political will be to take such measures during a recession? And if this is done during a recession, the expense of handling the unemployed will fall back again on government, especially with a population now drained of savings and mired in debt.

This leaves one final option: a shift in taxes onto unearned income, namely land value taxes (LVT). The LVT is not the same as a property tax, as it does not punish those who put the land to use; it taxes only the land, not the structure built on top of it. The benefits of LVT have been much discussed by famed economists across the political spectrum from Joseph Stiglitz to Milton Friedman. Unlike labour and capital, land cannot flee the country, or change in supply. It can be taxed without passing on price increases. It’s highly transparent, as property cannot be hidden, and it’s progressive — most of the rise in wealth inequality can be attributed to land. However, most of all, it is one of the rare taxes that does not diminish economic activity, and in fact stimulates it. It lights fire under the feet of land speculators and those underusing large lots of valuable urban land, putting it to its highest and best use. It pushes more units of housing onto the market, making them more accessible and affordable. It can also be combined with other incentives, proposed by the New Physiocratic League in the form of ULT, to shape our towns, cities, architecture, housing, commute times, and amenities in the ways we desire.

Going back to the Henry George theorem, since increases in government spending (particularly in infrastructure) disproportionately raises land values, an LVT makes infrastructure spending self-funding. Tax receipts would rise as a result of the investment. It would even allow for a reduction in transit fares, the gains of which would be recollected from the LVT.

Shedding taxes on labour and capital, while shifting the burden onto land (and perhaps other unearned income) is the only way out of the fiscal hole that many nations have dug themselves into. It ensures credit flows into building homes, not hoarding land. By allowing for the removal of taxes on earned income, it producers higher net incomes and investment. By doing so, it is also the first and perhaps most crucial step in addressing current account imbalances, housing affordability, and economic injustice.

Is an LVT politically viable?

For a start, many governments will be left with no choice. Some might give the green light to central banks to attempt to cut debt by using inflation and monetization as a band-aid solution that will inflict tremendous pain, or will simply not succeed due to slowing monetary velocity. Those attempting half-hearted tax or spending reforms will run into walls from either increasing debt levels or the heavy burden of austerity.

The good news is, despite major resistance from certain lobbies, LVT is already making a comeback in the political realm for the first time since the early 20th century, before the memory of Henry George took a century-long hiatus from our collective minds. LVT has already been a success in the past in some localities in the US, Australia, and Asia. It has been within the scope of political discussion of officials in Asia recently, particularly in Thailand, Korea, and Taiwan, where some Georgist policies have already had success. Major political parties in the UK, both national and regional, have recently adopted the LVT as part of their platform, which gives a lot of hope that an LVT in the UK will come to fruition before the middle of the next decade, replacing more harmful taxes. A recession will hasten this change, due to a lack of other options to fund government. The UK will likely be the biggest testing ground for an LVT in the 2020s, from which we hope to learn a lot.

So while the 2020s will certainly inflict a lot of pain due to policy mistakes of the previous years, there is now hope that governments will be forced into long overdue corrections, which start with an LVT. Without it, sovereign defaults, hyperinflation, and depression, none of which mix well with the current global political environment, are the dangerous paths we don’t want to take, as we have in the past.

This article was originally published at Medium by Phil Allen, the founder of The New Physiocratic League project. The New Physiocratic League is a political-economic framework and certification body, with a mission to create a world where we regain and amplify our earned income, and democratize our physical space. More information is available at their website as well as their YouTube channel.