International Monetary Fund

Update on Fiscal Stimulus

IMF Update on Fiscal Stimulus and Financial Sector Measures

April 26, 2009

About this Note

This note provides an update of information in the paper, The State of Public Finances: Outlook and Medium-Term Policies After the 2008 Crisis, issued in March 2009, as well as in the surveillance note for the March G-20 Meeting.

The overall fiscal expansion for the G-20—reflecting both nondiscretionary developments (such as the effect of the automatic stabilizers) and discretionary actions in support of the economy—will be 5½ percent of GDP in both 2009 and 2010 relative to the pre-crisis period, somewhat larger than previously estimated.

New discretionary fiscal stimulus measures have raised Fund staff estimates for the G 20 countries to 2 percent of GDP in 2009 and 1.5 percent of GDP in 2010. In addition, new G-20 financial and sectoral support measures increase the estimate of headline support (including guarantees) by 3¼ percent of GDP to 32 percent of GDP, although upfront government financing needs remain unchanged at 3½ percent of GDP. Support provided by the advanced G-20 countries is higher (50 percent and 5¼ percent of GDP).

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Overall fiscal expansion

1. Updated Fund staff projections for the April World Economic Outlook indicate that the overall fiscal expansion relative to pre-crisis levels will be larger than previously estimated.1 For the G-20, the increase in the average overall fiscal deficit is estimated at 1.3 percent of PPP-weighted GDP in 2008, 5.5 percent in 2009 and 5.4 percent in 2010 (all with respect to 2007, Table 1). This compares with expected expansion of 1.5 percent of GDP in 2008, 4.7 percent in 2009, and 5.1 percent in 2010 at the time of the March 13–14 G-20 Meetings.2 With discretionary stimulus being withdrawn in 2010, G-20 fiscal positions next year are influenced by higher contributions from automatic stabilizers.

Fiscal stimulus in the G-20 countries

2. New measures announced by G-20 countries raise stimulus estimates relative to mid-March from 1.8 percent to 2.0 percent of PPP-weighted GDP in 2009 and from 1.3 percent to 1.5 percent of GDP in 2010 (Table 2). The aggregate amounts have increased from US$780 billion to US$820 billion in 2009, and from US$590 billion to US$660 billion in 2010. Stimulus remains weighted to spending by a 2:1 margin and focused mainly on 2009. Estimates for 2010 reflect phased implementation of spending initiated this year or carryover of tax provisions.

3. The updated estimates reflect recent measures in several countries:

• The new stimulus package in Japan raises estimates from 1.4 percent to 2.4 percent of GDP in 2009, and from 0.4 percent to 1.8 percent of GDP in 2010. The package is tilted toward spending, particularly on public investment, support for local communities, and measures to promote lower carbon emission.3

• With introduction of a supplementary budget, estimates for Korea for 2009 have increased from 2.3 percent to 3.9 percent of GDP. The new measures are entirely on the expenditure side, with a focus on job creation. For 2010, the amounts are slightly lower—1.2 percent versus 1.3 percent of GDP, previously.

• Stimulus measures in the 2009 budget have increased estimates for Russia from 2.3 percent to 4.1 percent of GDP in 2009. For 2010, the estimate has decreased from 1.6 percent to 1.3 percent of GDP in 2010.

Estimates have also changed recently for Argentina, Brazil, France, and Turkey, while estimates for Canada now incorporate stimulus measures taken at the provincial level.

Financial sector support

4. Fiscal policy has also continued to play an important role in supporting the financial sector. Augmented measures in some G-20 countries increase the composite estimate of headline financial and sectoral support (including guarantees) for the G-20 as a whole by 4¼ percent of GDP to 32 percent of PPP weighted GDP, although upfront government financing needs remain unchanged at 3½ percent of GDP (Table 3). Unlike the fiscal stimulus measures, the bulk of financial sector support measures have been provided in the advanced G-20 economies, where the total headline support is now 49¾ percent of GDP, with upfront financing of 5¼ percent of GDP. The average headline support in G-20 emerging markets is around 2½ percent of GDP.

5. Recent specific measures are:

• In Japan, liquidity facilities were expanded by ¥1 trillion. In April, the government announced additional support to the financial sector, amounting to ¥41¾ trillion, including guarantees, loans, and purchase of commercial papers mostly targeted to Small and Medium Enterprises (SMEs). The central government budget will provide ¥3 trillion to support these operations. Headline support and upfront financing needs will increase by 9¼ percent of GDP and ½ percent of GDP, respectively.

• In Korea, the government announced that its state-owned Korea Asset Management Company will issue KRW 40 trillion of government-guaranteed bonds to purchase NPLs and troubled assets of financial institutions and companies under restructuring. The increase in headline support is expected to be 4¼ percent of GDP, while the upfront government financing needs remain unchanged.

• In the United States, the Federal Reserve Board announced an increase in purchases of Government Sponsored Enterprises (GSE) debt and mortgage-backed securities by US$100 billion and US$750 billion, respectively. These operations will increase the Fed’s liquidity support by 6 percent of GDP, raising the headline support accordingly, but would not entail any upfront government financing.

Table 1. G-20 Countries: Overall Fiscal Expansion

Table 2. G-20 Countries: Discretionary Measures, 2008-10

Table 3. Headline Support for the Financial Sector and Upfront Financial Need

1 The change in overall fiscal balances is a comprehensive measure of the role of fiscal policy is playing in supporting economic activity, as it comprises both discretionary and automatic components.

2 Financial sector support measures in the U.S. (1.4 percent of GDP in 2008, 4.5 percent in 2009, and 0.9 percent in 2010) and Japan (0.1 percent of GDP in 2008, 0.5 percent of GDP in 2009 and 0.2 percent in 2010) are excluded.

3 Staff estimates are lower than headline figures due to inclusion in the latter of financial-sector support.