A Crisis Warning Is in Danger of Being Forgotten
Governments in Asia are understandably wary of going too far down the same road as the U.S. can with fiscal moves. Are they right?
(Bloomberg Opinion) -- Economies plotting their exit from the pandemic have a tough needle to thread: determining when to pivot from pumping out emergency aid to focusing on the costs. South Korea and Australia are displaying what may prove a premature tendency to worry about their fiscal health before the patient is off life support.
Korea has been a Covid-19 star, managing to curb infections without a nationwide lockdown and containing the economic damage. President Moon Jae-in wants to restore the nation’s reputation for budget prudence once the pandemic subsides, and this week proposed legal caps on debt and deficits. The mooted rules are significant because the government has passed four stimulus packages this year that helped put a floor under the economy. Gross domestic product may shrink just 1% in 2020, according to the Organization for Economic Cooperation and Development. Only China, where the economy is predicted to grow, is forecast to do better.
It’s questionable whether Korea is ready for such fiscal rectitude. The economy hardly escaped the pandemic unscathed. GDP shrank 2.7% in the second quarter from a year earlier, inflation is too low, and exports have only just started increasing again. Meanwhile, the nation’s long-term demographic challenges — shrinking headcount and a population concentration in the capital area — aren’t any closer to being solved.
Against this backdrop, the government plans to limit debt to 60% of GDP and restrict the fiscal deficit to 3% from 2025. The country’s debt ratio is expected to climb to 43.9% this year and hit 58.3% by 2024, according to next year’s budget proposal. Some officials worry that the pace of debt increases could imperil the country’s credit rating. An untimely retrenchment in borrowing that undermines the recovery won’t help.
In Australia, the balancing act is particularly fraught. The budget was supposed to be in surplus around now, based on election campaign messages last year from Prime Minister Scott Morrison. Instead, the government's projection Tuesday was for a record peacetime deficit of about $150 billion, or around 11% of GDP. For a center-right government wary of excessive Keynesian pump-priming, that’s uncomfortable.
Australia’s budget contains welcome measures to prop up employment, as well as tax cuts. Even so, debt Down Under remains well below overall OECD benchmarks and Canberra's interest payments will actually decline in the next few years. That’s thanks to the Reserve Bank of Australia's ultra-easy monetary policy, consisting of near-zero interest rates and a form of quantitative easing that caps yields. The RBA foreshadowed more steps at its monthly meeting Tuesday, hours before the budget was delivered.
While Asia has embraced fiscal stimulus, the ardor has limits. That shouldn’t be surprising when the world’s largest economy is bickering over the issue. President Donald Trump halted talks with Democrats on further government assistance, amid resistance among Republicans in Congress to a support package exceeding $2 trillion.
The U.S. has privileges that should give it more flexibility. Having the world's reserve currency means there's little real limit on Washington's ability to borrow. Without the same printing press, governments in Asia are understandably wary of going too far down the same road. They are fortunate that central banks are engaging in muscular stimulus, in many instances buying bonds. That doesn’t amount to outright debt monetization in most cases, though it does help finance state spending.
The joint deployment of budgetary and monetary arsenals has been one of the remarkable things about the pandemic response worldwide. It seems the lessons of the slow recovery that followed the global financial crisis a decade ago had been learned. They’re in danger of being forgotten again. Hours before Trump broke off talks Tuesday, Federal Reserve Chair Jerome Powell cautioned against providing too little government stimulus, saying it would lead to a weak recovery and unnecessary hardship. That warning should reverberate in Asia just as much as in America.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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