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Close look: Fiscal stimulus - What's the big story?

3 years ago
Interest rates tumbled in the years following the Great Financial Crisis, as central banks attempted to kick-start economic growth. But has that game now played out? In recent months there has been a rising chorus of demands for governments to take up the baton, forget about austerity and start spending large sums of money. Either by rolling out big infrastructure projects, or simply by cutting taxes. And that’s what is meant by fiscal stimulus. Let’s look at some examples.

When President Trump came to office in 2017 he promised an ‘America First’ budget. Spending plans included a boost to the US military, as well as the infamous wall along the border with Mexico. Progress has been slow with this particular project and yet US government debt keeps on rising. Recent estimates forecast a budget deficit close to $1tn by the end of 2019. 

Germany, a more naturally prudent economy, has attempted to achieve a ‘schwarze Null’ or black zero. That means a perfectly balanced budget. In fact, government spending has been so tightly controlled that the country is now running a budget surplus close to 2% of GDP. The influential Green Party is looking to unlock spending via environmental initiatives over the next few years.

Elsewhere, Japan has recently announced a stimulus package of $121bn, aimed at typhoon repairs and investment in infrastructure and new technology. And the UK has been promised a ‘Brexit bonus’, boosting an economy held back by the uncertainties of leaving the EU. Over the next five years spending of up to £100bn ($130bn), including on roads, rail links and hospitals, is due to be unleashed.

So, governments’ views on fiscal stimulus range from reluctance in some quarters to big promises in others. Always remember that the cost ultimately falls to the taxpayer. Or, if funded by government borrowing, to the taxpayers of the future. Nonetheless, with global growth and inflation still sluggish, the world is waiting to see where the central banks’ challenge will now be met.

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