IMFSurvey Magazine: Policy
WORLD ECONOMIC CRISIS
Stimulus Measures Bolstering Demand Amid Crisis, IMF Says
IMF Survey online
February 6, 2009
- G-20 stimulus measures total 1.5 percent of GDP in 2009
- Infrastructure spending has largest impact on growth, but takes a while
- Measures will cause sizeable worsening of fiscal deficits in short term
Most of the world's leading advanced and emerging market economies have adopted stimulus measures to counter the growing financial and economic crisis, according to an analysis by the IMF that estimates the collective impact on growth of around ½ -1¼ percentage points.
Automatic stabilizers, such as welfare payments and unemployment pay, are also helping to counter the global downturn triggered by the subprime crisis in the United States.
In a note prepared for a meeting of deputies from the Group of Twenty (G-20) in London that took place January 31-February 1, the IMF provided estimates for the size and growth impact of the stimulus measures adopted by G-20 governments (see page 18 of the IMF note).
It said that so far, G-20 countries have adopted (or plan to adopt) fiscal stimulus measures amounting on average to around ½ percent of GDP in 2008, 1½ percent of GDP in 2009, and about 1¼ percent of GDP in 2010, although most G-20 countries have yet to announce specific fiscal packages for next year and the amounts largely reflect phased implementation or continuation of measures announced for 2009.
The IMF analysis said there is considerable variation across G-20 countries in the size and composition of the stimulus packages. The fiscal stimulus has so far consisted of one-third revenue measures and two-thirds expenditure measures.
Revenue measures have been focused on cuts in personal income taxes and indirect taxes, such as VAT or excises, while increased spending for infrastructure has been emphasized on the expenditure side. Infrastructure spending is expected to have the largest impact on growth, although it also has the longest implementation lags, while tax cuts are likely to have a more modest growth impact—particularly if they are not targeted to credit constrained consumers.
Other expenditure measures include transfers to states or local governments, support for housing sectors, and aid to small and medium-sized enterprises.
• Almost half of the G-20 countries have announced sizeable cuts in personal income taxes (including Canada, Germany, Indonesia, Italy, the United Kingdom, and the United States), while around one-third have announced reductions in indirect taxes. At the same time, about half of the G-20 countries also have plans to cut corporate income taxes (Canada, France, Germany, Indonesia, Korea, Russia, Spain, and the United States, among others).
• Three-quarters of the G-20 countries have announced plans to increase spending on infrastructure, largely on transportation networks (Canada, China, France, Germany, Indonesia, Italy, Korea, Saudi Arabia, and the United States among others)—either in the form of direct central government spending, or through capital transfers to local authorities.
• Many countries have announced plans to protect liquidity-constrained or vulnerable groups, including by strengthening unemployment benefits (Canada, Russia, the United Kingdom, and the United States), cash transfers, including to the poor, (Canada, Korea, Japan), or support to children (Australia, Germany) or pensioners (Australia, Canada); or by extending concessional loans to low-income citizens (Saudi Arabia).
• A few G-20 countries are also stepping up support for small- and medium-sized enterprises (Korea) and strategic or vulnerable sectors, such as construction (Canada and Germany), defense and agriculture (Russia).
• Finally, a few countries are using stimulus measures to address longer-term policy challenges, such as improving the quality of health and education (Australia, China, and Saudi Arabia) or introducing incentives for development of environmentally friendly technologies (Canada, China, Germany, and the United Kingdom).
The IMF said that the combined fiscal stimulus currently planned is expected to have a considerable impact on G-20 growth in 2009—of the order of ½ - 1¼ percentage points. The effects on advanced and emerging economies would be broadly similar. Among the advanced economies, the growth impact is expected to be highest in Canada, Germany, Japan, Korea, and the United States. Among the emerging economies, China, Russia, and South Africa are expected to receive the most significant boost to growth.
In 2010, under current information regarding the size of fiscal packages, the additional growth effect would be minimal, but would increase should countries adopt further measures.
Stabilizers kicking in
The operation of automatic stabilizers is also helping to bolster demand by lowering the tax burden and increasing public spending, but this is contributing to a deterioration of countries' fiscal accounts. Lower tax revenues owing to specific features of the recent downturn have also adversely affected fiscal balances.
Looking across G-20 countries, there is considerable variability on the strength of automatic stabilizers both within the advanced economies and between advanced and emerging economies— the projected impact in 2009 ranges from around 2 percent of GDP for France, Korea, and the United Kingdom to 1½ percent for the United States, down to ¼-½ percent for several emerging economies, including Brazil, China, India, Indonesia, and South Africa.
Government debt is also being boosted by extraordinary support to troubled financial institutions and markets in advanced economies, and to a lesser extent in emerging economies. Many governments, particularly in advanced economies, have injected capital into systemically important banks, provided direct loans to financial institutions, and, in some cases, purchased illiquid assets. Such support is critical to restoring the health of the financial sector, and greater recourse to recapitalization of banks using public balance sheets may become necessary in the period ahead.
Worsening fiscal positions
The combination of discretionary fiscal stimulus, automatic stabilizers, impact of nondiscretionary effects and direct balance sheet support to financial institutions will lead to a sizeable worsening of G-20 countries' fiscal positions in the short run. Based on measures already taken and current plans, it is estimated that government debt ratios and fiscal deficits, particularly in advanced economies, will increase significantly.
For the G-20 as a whole, the general government balance is expected to deteriorate by 3½ percent of GDP, on average, in 2009. While the fiscal cost for some countries will be large in the short run, the alternative of providing no fiscal stimulus or financial sector support would be extremely costly in terms of the lost output.
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