National fiscal policy response to the Great Recession

Beginning in 2008 many nations of the world enacted fiscal stimulus plans in response to the Great Recession. These nations used different combinations of government spending and tax cuts to boost their sagging economies. Most of these plans were based on the Keynesian theory that deficit spending by governments can replace some of the demand lost during a recession and prevent the waste of economic resources idled by a lack of demand. The International Monetary Fund recommended that countries implement fiscal stimulus measures equal to 2% of their GDP to help offset the global contraction.[1] In subsequent years, fiscal consolidation measures were implemented by some countries in an effort to reduce debt and deficit levels while at the same time stimulating economic recovery.

Americas

United States

In 2008 the United States Congress passed—and then-President George W. Bush signed—the Economic Stimulus Act of 2008, a $152 billion stimulus designed to help stave off a recession. The bill primarily consisted of $600 tax rebates to low and middle income Americans.[2]

The United States combined many stimulus measures into the American Recovery and Reinvestment Act of 2009, a $787 billion bill covering a variety of expenditures from rebates on taxes to business investment. $184.9 billion was to be spent in 2009, and $399.4 billion was to be spent in 2010 with the remainder of the bill's appropriations spread over the rest of the decade.[3] Announcements of rescue plans were associated with positive returns whereas a public intervention in favor of a specific bank showed negative impacts.[4]

Asia

China

A statement on the government's website said the State Council had approved a plan to invest 4 trillion yuan in infrastructure and social welfare by the end of 2010.[5][6] This stimulus, equivalent to US$586 billion, represented a pledge comparable to that subsequently announced by the United States, but which came from an economy only one third the size.[7] The stimulus package will be invested in key areas such as housing, rural infrastructure, transportation, health and education, environment, industry, disaster rebuilding, income-building, tax cuts, and finance.[8]

China's export driven economy started to feel the impact of the economic slowdown in the United States and Europe, and the government had already cut key interest rates three times in less than two months in a bid to spur economic expansion.

The stimulus package was welcomed by world leaders and analysts as larger than expected and a sign that by boosting its own economy, China is helping to stabilize the world economy. World Bank President Robert Zoellick declared that he was ‘delighted’ and believed that China was ‘well positioned given its current account surplus and budget position to have fiscal expansion.'[7] News of the announcement of the stimulus package sent markets up across the world.[9]

Japan

In April 2009 Japan announced a third stimulus plan of 15.4 trillion yen stimulus ($153 billion). This new plan includes 1.6 trillion yen investment in low-carbon technology, 1.9 trillion yen on employment programs, and 370 billion yen for new car subsidies.[10] The legislature responded to a request from Prime Minister Taro Aso for a stimulus that equal to 2% of GDP. Japan has been one of the hardest hit nations during the recession, having already experienced a lost decade when economic growth stagnated.[11] Japan's total stimulus amounts to 5% of its GDP. Since taking office, Prime Minister Also has passed 25 trillion yen ($250bn) in stimulus.[12] Japan has basically exhausted its conventional monetary policy options with a near zero nominal interest rate.[13]

South Korea

South Korea 14 trillion won ($10.8bn) stimulus package in November 2008. The November package includes 4.6 trillion won for regional infrastructure and 3 trillion won in tax break—mainly for factory investment. South Korea's stimulus totaled [14]

In April 2009 South Korea enacted a "cash for clunkers" program that will give a tax break of 2.5 million won ($1,900) to drivers who replace a car nine years old or older with a new car.[15] The tax break will be in effect from May to December 2009 and is estimated to boost Hyundai sales from 530,000 to 580,000 and Kia sales from 327,000 to 357,000.[16]

South Korea's 2009 budget includes $13bn in employment stimulus including handouts, training, and infrastructure. South Korea's total stimulus in 2008-2009 amounts to about $69 trillion won ($52bn).[17]

Europe

European Union

The European Union passed a 200 billion euro plan with member countries developing their own national plans, worth 170bn to 200bn euro in total, and an EU-wide plan of 30bn euro coming from EU funding.[18] The European Commission recommends that member nations' stimulus plans amount to at least 1.2% of GDP.

In subsequent years, some European Union countries have undertaken fiscal consolidation.[19]

Germany

Compared to other European nations, Germany is in a unique position: It has low debt, a high balance of trade, and an export driven economy. The recession has led to a decline in German exports, but Germany has the capacity to replace some of the export demand with domestic stimulus.[20] The Germans were initially hesitant to pass a large stimulus bill; however, in 2009, the Germans passed a 50bn euro stimulus bill that focused on taxes, a child tax credit, and spending on transportation and education.[21] Prior to the 2009 stimulus, one of Germany's largest stimulus efforts had been a scrappage program. The German stimulus program includes a "cash for clunkers" program that offers rebates of $3,172 to Germans who scrap their old cars for new, more efficient models.[22] The program totals about 5 billion euros.[23]

Hungary

Hungary has a high level of debt and cannot effectively raise the money needed for deficit spending. They have unveiled a $7bn package of tax cuts and loan guarantees directed towards businesses, especially small and medium-sized enterprises.[24]

The Netherlands

In November 2008 the Dutch government passed a 6bn euro plan that mainly consisted of tax breaks for businesses that made larger investments and hired short-term workers. The package also included a new program to help find work for the unemployed,[25] and faster public sector investment.[18] In January 2009 the Dutch added a variety of guarantees to help ensure and encourage exports, corporate loans, and home and hospital construction.[18]

United Kingdom

In 2008 the United Kingdom was one of the major economies leading calls for fiscal action to stimulate aggregate demand. Throughout that year a number of fiscal measures were introduced including a £145 tax cut for basic rate (below £34,800 pa earnings) tax payers, a temporary 2.5% cut in Value Added Tax (Sales Tax), £3 billion worth of investment spending brought forward from 2010 and a variety of other measures such as a £20 billion Small Enterprise Loan Guarantee Scheme.[26] The total cost of these measures, mostly announced in the November 2008 Pre-Budget Report was roughly £20 billion (not counting loan guarantees).[27] Further limited measures worth £5 billion were unveiled in the 2009 budget including training help for the young unemployed and a "car scrappage" scheme which offered £2,000 in subsidy for a new car purchase for the scrapping of a car more than 10 years old (similar to schemes in Germany and France).[28]

After 2008 the UK was limited in its ability to take discretionary fiscal action by the significant burden that bank bail-outs had on public finances. This contributed to a significant rise in the deficit to an estimated £175 billion (12.4% of GDP) in 2009-10 and a rise in the national debt above 80% of GDP at its peak.[28] Nonetheless, the UK has significant automatic stabilisers which contributed far more than discretionary action and more than most other countries.[29] As a result, further discretionary fiscal action was limited.

In 2010 the UK began a fiscal consolidation program after the Labour government’s fiscal stimulus package was withdrawn and the new Conservative–Liberal Democrat coalition government implemented spending cuts and increases in indirect taxation. Additional fiscal consolidation measures continued under the Conservative government elected in 2015.[30]

Oceania

Australia

A school in Australia with signage proclaiming the works as part of the "Economic Stimulus Plan"

First stimulus

In October 2008, the Rudd government implemented a A$10 billion stimulus package with the support of the Senate crossbench. The package included:[31]

Second stimulus

In February 2009, the Rudd government implemented a A$42 billion stimulus package again with the support of the Senate crossbench. The package included:[32]

Outcome

Australia avoided recession and its growth figures were internationally very high, whilst unemployment remained comparatively low, despite net public sector debt remaining substantially low.[33][34][35] It has been disputed as to whether fiscal policy actually helped Australia avoid recession however, with sources citing high NGDP growth,[36] healthy trading partners, a responsible banking industry, no housing collapse, a booming population,[37] and the Australian mining boom.[38]

The packages were praised by various business groups, economists, the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD).[39][40][41][42][43]

References

  1. ↑ Group of Twenty: Global Economic Policies and Prospects." http://www.imf.org/external/np/g20/pdf/031909a.pdf
  2. ↑ "Bush signs stimulus bill; rebate checks expected in May". CNN. 13 February 2008. Retrieved 19 May 2010.
  3. ↑ H.R. 1 Conference Agreement. (PDF) . Retrieved on 2010-07-20.
  4. ↑ Fratianni, Michele; Francesco Marchionne (2009). "Rescuing Banks from the Effects of the Financial Crisis" (PDF). SSRN Working Paper.
  5. ↑ Barboza, David (2008-11-10). "China unveils sweeping plan for economy". International Herald Tribune. Retrieved 2013-11-22.
  6. ↑ Paul Maidment. "China Announces Massive Stimulus Package". Forbes.com. Archived from the original on 2008-11-12. Retrieved 2008-11-11.
  7. 1 2 Can China Manage Its Economy?
  8. ↑ "China plans 10 major steps to spark growth as fiscal, monetary policies ease". News.xinhuanet.com. Retrieved 2008-11-14.
  9. ↑ Lee, Don (2008-11-10). "China's $586-billion stimulus plan could boost world economy". The Los Angeles Times. Retrieved 2008-11-14.
  10. ↑ Rial, Patrick. "Asian Stocks May Climb on Japan Stimulus, China Money Supply." Bloomberg. 13 April 2009. http://www.bloomberg.com/apps/news?pid=20601087&sid=a.Mekf7yvAbg&refer=home
  11. ↑ "Japan in 10 trillion yen stimulus." BBC News. 6 April 2009. http://news.bbc.co.uk/2/hi/business/7985239.stm
  12. ↑ Kyoko Shimodoi and Keiko Ujikane. "Aso to Unveil 15.4 Trillion Yen Japan Stimulus Plan." Bloomberg. 9 April 2009. http://www.bloomberg.com/apps/news?pid=20601068&sid=ajEJpJUo6nGc
  13. ↑ Eswar Prasad and Isaac Sorkin. "Assessing the G-20 Stimulus Plans: A Deeper Look." The Brookings Institution. March 2009. http://www.brookings.edu/articles/2009/03_g20_stimulus_prasad.aspx
  14. ↑ Seyoon Kim. "South Korea Plans 14 Trillion Won Stimulus in 2009." Bloomberg. 3 November 2008. http://www.bloomberg.com/apps/news?pid=20601087&sid=au_aCj.eWwIE&refer=home
  15. ↑ "South Korea offers tax break on old cars in stimulus bid." Agence France-Presse. 13 April 2009. http://www.etaiwannews.com/etn/news_content.php?id=918384&lang=eng_news
  16. ↑ "Hyundai Motor, Kia Shares Rise on Tax Breaks." The Korea Times. 13 April 2009. https://www.koreatimes.co.kr/www/news/biz/2009/04/123_43059.html
  17. ↑ Seyoon Kim. "South Korea Plans to Spend Record 17.7 Trillion Won." Bloomberg. 24 March 2009. http://www.bloomberg.com/apps/news?pid=20601068&sid=a1nA3nYgmEdA&refer=home
  18. 1 2 3 Sylvester Eijffinger. "Banking rescue and economic recovery plans in the Netherlands and other EU Member States: Why the Dutch should do more." Voxeu.org. 5 February 2009. http://voxeu.org/index.php?q=node/2994
  19. ↑ "EU fiscal consolidation after the financial crisis: Lessons from past experiences". VOX CEPR's Policy Portal. 2 October 2010. Retrieved 2 February 2016.
  20. ↑ Andrea Boltho and Wendy Carlin. "Germany needs high wage settlements and a serious fiscal stimulus." Voxeu.org. 26 November 2008. http://voxeu.org/index.php?q=node/2613
  21. ↑ "Germany agrees 50bn euro stimulus". BBC News. 13 January 2009.
  22. ↑ "Germany's Auto-Woes Fix: Scrap That Clunker!". Time. 12 March 2009. Retrieved 19 May 2010.
  23. ↑ Die Konjunkturpakete - Wir bauen Zukunft - Startseite. Konjunkturpaket.de. Retrieved on 2010-07-20.
  24. ↑ UPDATE 2-Hungary plans $7 bln stimulus to fight slowdown. Forbes.com (2008-11-13). Retrieved on 2010-07-20.
  25. ↑ "Dutch move on $10 billion rescue program - CNN.com". CNN. 21 November 2008. Retrieved 19 May 2010.
  26. ↑ "Small business loan plan unveiled". BBC News. 14 January 2009. Retrieved 19 May 2010.
  27. ↑ "Darling unveils borrowing gamble". BBC News. 24 November 2008. Retrieved 19 May 2010.
  28. 1 2 "At-a-glance: Budget 2009". BBC News. 22 April 2009. Retrieved 19 May 2010.
  29. ↑ page 28
  30. ↑ "Cutting the deficit: three years down, five to go?". The Institute for Fiscal Studies. 8 May 2013. Retrieved 2 February 2016.
  31. ↑ Rudd's $10b golden goose: SMH 14 October 2008
  32. ↑ $42 billion spent to kickstart economy with Budget going into deficit and handouts for many: News.com.au 3 February 2009
  33. ↑ 2009 GDP Real Growth Rate Country Comparison: CIA World Factbook, see map on Wikipedia at Global Financial Crisis
  34. ↑ Australia able to avoid recession: BBC News 3 June 2009
  35. ↑ Kevin Rudd's BER bungle may have saved Australian economy: News.com.au 3 June 2010
  36. ↑ Did Australia’s Fiscal Stimulus Counter Recession?: Evidence from the National Accounts
  37. ↑ http://www.cbsnews.com/news/how-australia-ducked-the-crisis/ How Australia Ducked the Crisis
  38. ↑ http://www.theaustralian.com.au/business/opinion/how-mining-helped-australia-avoid-recession/story-e6frg9if-1225877644676 How mining helped Australia avoid recession
  39. ↑ Initial praise for Govt stimulus package - ABC News (Australian Broadcasting Corporation). Abc.net.au (2009-02-03). Retrieved on 2010-07-20.
  40. ↑ Stimulus packages can save Australia: IMF - National. BrisbaneTimes (2009-03-20). Retrieved on 2010-07-20.
  41. ↑ OECD praise for Canberra's stimulus package. Theage.com.au (2009-09-17). Retrieved on 2010-07-20.
  42. ↑ World News Australia - Stimulus package gets thumbs up. Sbs.com.au. Retrieved on 2010-07-20.
  43. ↑ Economists praise stimulus package. Businessday.com.au (2009-02-03). Retrieved on 2010-07-20.

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