World’s top economies now using more fiscal firepower for growth, but this may not happen fast enough

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Published: February 23, 2020 9:26:51 AM

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

The world remains far from an across-the-board easing.

Governments across the world are starting to use more fiscal firepower to boost economies, though the shift may not be happening fast enough to appease central bankers who say they’re 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 U.K. and Russia have ditched long-held commitments to austerity.

The world remains far from an across-the-board easing. Japan recently raised sales taxes, Germany still holds its surplus sacred, and U.S. 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 roundup of budget forecasts and recent policy shifts in some key countries.

U.S.

  • 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’s 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 November’s elections.

China

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

With entire industries and regions in lockdown because of the virus, and the government adamant that it won’t lower growth targets, China is set for more fiscal stimulus. The government said this week it’s preparing additional measures including cuts in corporate taxes and fees. There’s already some strain on the budget as a result of trade war with the U.S., and Finance Minister Liu Kun acknowledged there’ll be “short-term challenges.” But he said 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 won’t 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 neighbors. The European Central Bank and the French government are among those calling for action. But while Chancellor Angela Merkel’s coalition has begun limited stimulus focused on green projects, there’s 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 aren’t enough to revisit that stance.

U.K.

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

Fresh from an unexpectedly decisive election win, Prime Minister Boris Johnson has signaled he’s 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’s 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. It’s 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% 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 bank’s call for easier fiscal policy to a boost a flagging economy. In February, it 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 government’s deficit below 3% 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 it’s unlikely that the extra money will all be spent. Italy has repeatedly run up against EU-imposed budget limits, and keeping this year’s 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 centerpiece.  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. But 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% 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’s 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.

Mexico

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

As Mexico’s economy stagnated over the last year, President Andres Manuel Lopez Obrador has kept fiscal policy tight. His government has been cutting spending on salaries, helping to deliver a budget surplus before interest payments of 1.1% in 2019 – and the goal is to stay in primary surplus this year. That likely leaves the central bank, which has cut interest rates at five straight meetings, carrying the burden of stimulus for now.

Indonesia

  • 2020 forecast: -2.2% (deficit)
  • 2021 forecast: -2.1%

Indonesia will front-load spending in the first half of 2020 to boost an economy growing at its slowest pace in four years. Its ability to inject more fiscal stimulus is limited by a hard ceiling on the budget deficit of 3% of GDP. That may leave the heavy lifting to the central bank — which delivered another rate cut this week, even though governor Perry Warjiyo insists that the bank “cannot be the only game in town.”

Saudi Arabia

  • 2020 forecast: -6.8% (deficit)
  • 2021 forecast: -6.1%

Saudi Arabia’s budget outcomes usually depend on the price of oil, the kingdom’s main source of revenue. Even before crude slumped this year, the government was expecting a bigger budget deficit in 2020. In an effort to limit the shortfall, it plans to reduce spending by about 3% in 2020 and continue cutting through 2022, part of a wider plan for the private sector to take a more prominent role in the state-dominated Saudi economy.

Turkey

  • 2020 forecast: -3.6% (deficit)
  • 2021 forecast: -3.3%

Fiscal easing has propped up growth in Turkey as President Recep Tayyip Erdogan’s preferred engine of stimulus — credit expansion supported by low interest rates — foundered amid a corporate-debt crisis. The government posted an annual deficit of about 3% of GDP last year, when back-to-back elections drove a spending spree, and expects a similar ratio in 2020.

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