Looking deeper at the G-20 stimulus plans

This is extracted from an article online: Assessing the G-20 Stimulus Plans: A Deeper Look by Eswar Prasad, Senior Fellow, Global Economy and Development.

Fiscal Stimulus Package (to stimulate domestic demand to rapid effect)

In an integrated world economy, the effectiveness of stimulus is contingent on how coordinated it is across countries. If the sizes of the stimulus packages (relative to domestic GDP) are very different across countries or if the effects of some countries’ stimulus packages are backloaded, then there could be “leakage” of stimulus from countries that act early and forcefully. By and large, policymakers in G-20 economies have acted on their leaders’ joint announcement in November 2008 to use fiscal stimulus in a concerted and coordinated manner to boost economic activity.

The significant figures

Measures for 2009 in the U.S. stimulus package amount to 1.9 percent of its 2008 GDP and the corresponding numbers for China and Japan are 2.1 percent and 1.4 percent, respectively. For the remaining G-20 economies, the total fiscal stimulus amounts to 1.0 percent of their overall GDP. Measures for 2010 in the U.S. stimulus package amount to 2.9 percent of 2008 GDP, China’s 2.3 percent, and Germany’s 2.0 percent.

In summary, while almost all countries have signed on to the fiscal stimulus program, the size of the stimulus varies substantially across countries, with some of the stimulus packages looking downright meek (e.g., France, which has proposed measures amounting to only 0.7 percent of GDP in 2009).

Tax cuts versus spending in stimulating domestic demand

Some countries—including Brazil, Russia and the U.K.—have focused almost entirely on tax cuts. Others—including Argentina, China and India—have mostly proposed spending measures. Among the G-20 countries excluding the U.S., about one-third of the stimulus is accounted for by tax cuts and the remainder by spending measures.

Different beliefs in length of recession

Of the 19 countries that make up the G-20, only four countries—China, Germany, Saudi Arabia, and the U.S.—plan to spend as much or more on stimulus (as a share of GDP) in 2010 than in 2009. In other words, there is a fair amount of frontloading in the stimulus packages of the G-20 countries, with much of the stimulus taking effect in 2009.

Questions to Ponder: In economies where the financial system has broken down and where monetary policy can no longer play much of a supporting role, how effective are the fiscal stimulus? Excessive government borrowing to finance large budget deficits could itself generate instability and there are serious concerns about medium-term sustainability of fiscal positions in economies that are building up public debt at a rapid pace.