Bye-Bye, Stimulus: Where Budget Cuts Threaten Growth Around the World
(Bloomberg Businessweek) -- The world economy bounced back from the Covid-19 slump faster than most forecasters reckoned was possible a year ago—thanks largely to record injections of government money. Now those aid programs are getting trimmed or wound down.
What that means for global growth is one of the key questions for 2022. Financial markets are fixated on how fast central banks will raise interest rates to counter surging inflation. But how governments adjust their budgets will likely have a bigger impact on economies than anything monetary authorities do, at least in the developed world.
Belt-tightening is under way at various speeds in different parts of the world, and much of it is provisional. The omicron variant could yet upend governments’ plans.
In the U.S., President Joe Biden’s proposals to ramp up spending on child care and clean energy have hit a wall in Congress, though they’re not dead yet. Offsetting that is the prospect of more stimulus in Japan and China—and perhaps in Europe, where Germany’s new government is keen to make green investments. Here’s a roundup of where fiscal policy is headed in some of the world’s biggest economies.
After the biggest stimulus program in history, budget policy swung from being a support for growth to becoming a drag in the second quarter of last year, according to the Brookings Institution’s gauge of fiscal impact.
Biden has been pushing a spending bill worth $1.75 trillion over a decade, with the biggest dollop coming this year. It includes an extension of the child tax credit and support for clean power and electric vehicles. The president has been unable to win backing from West Virginia Democratic Senator Joe Manchin, whose vote is needed to pass the measure, so it’s on hold for now.
If the so-called Build Back Better legislation collapses, it would likely shave about 0.75 percentage point off 2022 growth, according to Moody’s Analytics, which currently forecasts a 4% expansion. Passing a Manchin-approved version of the bill could add 0.5% to growth, Moody’s says. Meanwhile, Biden has acted to prolong one kind of stimulus that doesn’t require a Senate vote: extending a freeze on student-debt repayments until May.
Relatively restrained early in 2021, when the economy was rebounding strongly, China changed course when growth started to flag later in the year. Beijing began prodding local governments to borrow and spend faster. It also extended some personal income tax breaks as part of an effort to stimulate consumer spending. Expect more supportive measures in 2022, as officials endeavor to keep growth from sinking below 5%.
Negotiations over how to get back to fiscal normality have revived tensions between a “sound finance” camp—traditionally led by Germany—and those more concerned with avoiding a repeat of last decade’s austerity-driven slump. That clash won’t be resolved quickly, because the debt and deficit restrictions lifted during the pandemic will remain suspended throughout 2022.
France, which takes over the European Union’s rotating presidency for the first six months of 2022, has made investment and pro-growth policies the top priority. Germany’s new finance minister, Christian Lindner, has a reputation as a fiscal hawk and has repeatedly warned of the need to ensure “monetary stability” in the euro area. Yet on a visit to Paris in December, he remarked that Germany and France “don’t always share the same ideas,” but have a knack for consensus in the end.
Prime Minister Fumio Kishida—who faces national elections in the summer—unveiled a spending package in November that includes cash payments for families with children, wage increases for low-paid caregivers, and a revival of subsidies for domestic travel (currently on hold as the danger of omicron is assessed).
With an initial price tag of 56 trillion yen ($480 billion), equal to 10% of gross domestic product, the package was much larger in scale than expected, even if some of the measures are effectively re-ups of existing programs. Together, they will limit the drag on growth from the phaseout of other pandemic relief.
Chancellor of the Exchequer Rishi Sunak is redefining what it means to be a Conservative in Britain. In 2021, he raised taxes by more than any U.K. finance minister in almost three decades, amounting to a £46 billion charge ($62 billion)—about 2% of GDP—on households and companies. This was intended to fund extra spending on health care and austerity-ravaged public services without adding to debt racked up during the pandemic.
Sunak, who’s said it would be “immoral” to increase borrowing, is on track to get the national debt on a declining path by the middle of the decade. But his boss could throw him off course. With coronavirus raging once again, energy bills soaring, and interest rates set to rise, Prime Minister Boris Johnson is under mounting pressure to postpone a planned £12 billion payroll tax increase in April.
Brazil, which had the most generous pandemic stimulus among emerging economies, pared back much of it last year. But President Jair Bolsonaro, who is campaigning for reelection this year, is again increasing cash transfers to the poorest households. Doing so required changes to a government spending cap in place since 2016—and that helped weaken the currency and drive interest rates higher amid concerns about increased inflation, which is running above 10%.
Mexico kept a tight grip on spending. There were some signs of loosening in September’s budget proposal for 2022, which foresees a deficit of 3.1% of GDP, compared with 2.4% in a preliminary version. Still, President Andrés Manuel López Obrador says he won’t increase the national debt, and his administration recently announced a fresh round of cuts at government agencies, including mothballing the nation’s climate institute.
In Asia, Thailand and Malaysia have raised debt ceilings to accommodate more spending, while Vietnam is considering a new support package worth about 4% of economic output. Indonesia, meanwhile, has pared back its budget and raised taxes as it aims to bring its deficit back under 3% of GDP by 2023.
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