World

Coronavirus, slowing economy likely to prompt Governments to spend more

Bloomberg February 21 | Updated on February 21, 2020 Published on February 21, 2020

Governments across the world are starting to use more fiscal fire power to boost economies, though the shift may not be happening fast enough to appease central bankers who say they are sick of carrying the burden of stimulus alone.

In more than half of the world’s 20 biggest economies, analysts now expect looser budgets this year, in other words, bigger deficits or smaller surpluses than they did six months ago, according to a Bloomberg survey of economist forecasts.

Asian economies like China and South Korea are using fiscal policy to counter the menace of the coronavirus, which has shut down swaths of industry and devastated supply chains, while governments in the UK and Russia have ditched long-held commitments to austerity.

However, the world remains far from an across-the-board easing. Japan recently raised sales taxes, Germany still holds its surplus sacred, and US policy is gridlocked by upcoming elections. And some of the change in budget forecasts are a consequence of weaker growth expectations, rather than higher spending or lower taxes.

As finance ministers from the Group of 20 major economies prepare to meet in Riyadh, here’s a round-up of budget forecasts and recent policy shifts in some key countries.

USA

2020 forecast: -4.8% of GDP (deficit) 2021 forecast: -4.8%

President Donald Trump has delivered stimulus in the form of tax cuts and higher government outlays, and got a bump in growth as a result.

This month, Trump submitted a budget proposal to Congress that would pare back some of the spending, though he is also dangling a promise of more tax cuts targeted at the middle class. But neither proposal is expected to get past House Democrats who control the purse strings, so any major fiscal initiative is likely on ice until after Novembers elections.

China

2020 forecast: -4.8% (deficit) 2021 forecast: -4.6%

With entire industries and regions in lockdown because of the coronavirus, and the government adamant that it will not lower growth targets, China is set for more fiscal stimulus.

The government said this week that it is preparing additional measures including cuts in corporate taxes and fees. There are already some strains on the budget as a result of trade war with the US, and Finance Minister Liu Kun acknowledged there will be short-term challenges. However, he said that China must take a longer-term view and take resolute steps.

Japan

2020 forecast: -2.9% (deficit) 2021 forecast: -2.7%

Japan was already in danger of recession even before the scale of the coronavirus threat became clear partly because it tightened fiscal policy.

An increase in sales taxes in October 2019 contributed a plunge in output, just as it did the last two times the policy was tried.

Lawmakers approved a supplementary budget worth about $29 billion last month, and on paper that extra stimulus should arrive by the end of March, but history suggests the government probably will not manage to spend it all within the allotted time.

Germany

2020 forecast: 0.7% (surplus) 2021 forecast: 0.2%

Europe’s biggest economy has long been seen as a prime candidate for fiscal easing, since it has significantly less public debt than many neighbours. The European Central Bank and the French government are among those calling for action.

But while Chancellor Angela Merkels coalition has begun limited stimulus focused on green projects, there is no appetite to open the fiscal floodgates in a country where budget discipline remains a symbol of political virility.

A lingering manufacturing recession and the coronavirus outbreak probably are not enough to revisit that stance.

UK

2020 (fiscal year) forecast: -2.4% (deficit) 2021 forecast: -2.6%

Fresh from an unexpectedly decisive election win, Prime Minister Boris Johnson has signalled that he is ready to open the taps of government spending, and has already ditched a Finance Minister seen as less enthusiastic about that project.

Johnson aims to cement support among the working-class voters who helped deliver his landslide. He has outlined plans for infrastructure investment that skew toward poorer areas in northern England, and his new chancellor may be more amenable to relaxing the fiscal rules that would cap borrowing.

This is a departure for his Conservative party, which has prided itself on a reputation for fiscal discipline and been slammed by critics for embracing austerity.

France

2020 forecast: -2.4% (deficit) 2021 forecast: -2.3%

France heeded the call for fiscal stimulus before central bankers even made it.

Under pressure from the prolonged and often violent disruption of the Yellow Vest protests, President Emmanuel Macron tacked away from consolidating finances at the end of 2018 by unleashing around 17 billion euros of tax cuts.

That has contributed to keeping public debt near 100 per cent of economic output, leaving France with little margin for further stimulus should it be needed.

India

2020 forecast: -3.7% (deficit) 2021 forecast: -3.5%

India has heeded its central banks call for easier fiscal policy to a boost a flagging economy. In February, the RBI announced cuts in personal taxes that will cost the government $5.6 billion in revenue, a few months after a similar $20 billion handout to companies.

The tax cuts will likely lead to India missing the targets on what it calls a fiscal glide path,which is supposed to bring the central governments deficit below 3 per cent of GDP by March next year.

Italy

2020 forecast: -2.5% (deficit) 2021 forecast: -2.4%

Italy has increased tax revenues even as the economy struggled, and has plans for a fiscal overhaul starting in the next quarter. It has also introduced a tax on digital sales. But its unlikely that the extra money will all be spent.

Italy has repeatedly run up against EU-imposed budget limits, and keeping this years deficit in line with commitments will be difficult if the country falls into recession.

Brazil

2020 forecast: -5.5% (deficit) 2021 forecast: -5.3%

Brazil’s government is committed to trimming deficits, with last year’s overhaul of state pensions as the plan’s long-term centrepiece.

The budget shortfall in 2019 was the smallest in five years, though that was partly due to one-time injections of cash, including an oil auction. And while ministers are promising more belt-tightening measures, such as lower salaries for new public servants, they may struggle to persuade lawmakers ahead of municipal elections in October.

Canada

2020 forecast: -0.9% (deficit) 2021 forecast: -0.9%

Prime Minister Justin Trudeau’s government has already delivered a dose of fiscal stimulus in recent years, providing enough of a boost to allow the Bank of Canada to refrain from cutting interest rates. However the federal government’s ability to continue feeding growth is expected to fade in coming years, given Trudeau’s pledge to keep the country’s public-debt-to-GDP ratio on a declining path.

Russia

2020 forecast: 1.1% (surplus) 2021 forecast: 0.8%

Russia’s government is gearing up to spend from its $124 billion rainy day fund, after five years of some of the world’s toughest budget austerity.

The shift is aimed at boosting the stagnant economy and improving living standards in President Vladimir Putin’s final term as president.

Extra spending this year on infrastructure and social support could reach 1.3 per cent of gross domestic product. Further stimulus may be capped by Russia’s budget law, which says revenue from oil above $42 a barrel (it currently trades around $60) must be saved, not spent.

South Korea

2020 forecast: -1.3% (deficit) 2021 forecast: -1.4%

South Korea is set to post its first deficit since the global financial crisis as the government tries to support a recovery in exports and consumer spending.

The Moon Jae-in administration is front-loading its budget in the first half of this year, and bolstering support for firms hurt by the coronavirus outbreak in China, South Korea’s biggest trading partner.

Some lawmakers from the ruling party are calling on the government to go further and draw up a supplementary budget.

Australia

2020 forecast: 0.3% (surplus) 2021 forecast: 0.2%

Australia’s government is seeking to return its budget to surplus for the first time since 2008. It has been resisting calls for more spending from central bank chief Philip Lowe, who argues that historically low interest rates offer a chance to finance infrastructure.

But the recent wildfires, which devastated the east coast, have forced Treasurer Josh Frydenberg to loosen the purse strings in order to fund reconstruction.

Published on February 21, 2020
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