As they look to ease monetary policy, central bankers are also singing from the same songsheet when it comes to government support for their economies. They want more of it.
With the global growth outlook darkened by trade wars and borrowing costs already low, central banks say they can’t dispel the clouds on their own. From Federal Reserve Chairman Jerome Powell to European Central Bank President Mario Draghi, the demands are mounting for governments to loosen their budgets if the slowdown takes hold.
Markets are flashing a green light. It’s rarely been cheaper for governments to borrow — in many cases, investors end up paying them, since yields are negative. All kinds of economists, including the ones at the International Monetary Fund, agree that fiscal support is probably the way forward.
The questions are: which finance ministries have room to help and which are listening?
The U.S. and China have been loosening fiscal policy, while other major economies moved in the opposite direction.
It’s harder to track fiscal stimulus than the monetary kind. There are more instruments, with taxes and spending split across national or local levels that are hard to condense into a single number. (And different calculations can produce different results — here, IMF numbers are used throughout). The greater complexity is one reason why fiscal policy, while critical to understanding the economic outlook, gets less attention than central banks.
Following is an overview of the fiscal state of play in the world’s most important economies — what governments are doing, and what they’re talking about doing.
U.S.: Loose — But Gridlocked?
- 2018 Budget Balance: -4.3% of GDP (deficit)
- 2019 Forecast: -4.6%
The U.S. has been loosening fiscal policy under President Donald Trump. His combination of tax cuts and higher spending is unorthodox in an economy that’s been expanding for a decade. It did deliver a bump in growth last year, which is now fading. It also left the U.S. looking a bit like Japan a few years earlier — with a deficit above 4% of GDP and forecast to stay there for a decade.
Markets seem to be fine with the Trump stimulus. The president’s problem is that he has no easy way to repeat the trick. His Republican Party lost control of Congress, and therefore the purse strings, as of this year.
America has a debt ceiling that has to be increased before spending can rise, and there’s usually a political row. The latest one just got resolved, in a deal that suspends the ceiling for two years and edges spending higher. But there’s little incentive for Democrats, who want to beat Trump in next year’s presidential election, to juice the economy in ways that might help him.
What Bloomberg’s Economists Say
Fiscal hawks are a rare breed in Washington at the moment, and economic momentum is in any case not sufficiently robust to endure any meaningful austerity–after all, the Fed has deemed the economy frail enough to warrant renewed policy accommodation.
The chance of additional stimulus being incorporated ahead of the 2020 election is remote, given the nearly insurmountable hurdle of crafting a package that would appeal to both House Democrats and Senate Republicans.
–Carl Riccadonna, Bloomberg Economics
Eurozone: Germany Says ‘Nein’
- 2018 Balance: -0.6% (deficit)
- 2019 Forecast: -1%
Budget politics in the euro area make the American debate look friendly.
Europe is hobbled before it comes to the fiscal starting line, because there’s no authority parallel to the European Central Bank that can tax and spend on the continent’s behalf — while individual members lack the flexibility that comes with printing your own currency. Plus, the most powerful country, Germany, is obsessed with balanced budgets.
What Bloomberg’s Economists Say
For the first time in many years, the euro area is loosening fiscal policy, but not by much. Some countries, such as Germany, have considerable fiscal space and, when the next recession hits, the debate on government spending is likely to heat up considerably.
The new ECB President, Christine Lagarde, will try to convince policy makers that monetary policy can’t be the only show in town. However, politics may end up preventing any significant loosening of the purse strings.
— David Powell, Bloomberg Economics
It’s at the national level that budgets get decided, though the EU’s central authorities can intervene to cap deficits. Out of the three biggest Euro economies, one is injecting stimulus; one wouldn’t dream of it; and one is desperate to do so, but has been told it’s not allowed.
France: Yellow-Vest Boost
2018 Balance: -2.6% (deficit)
2019 Forecast: -3.3%
President Emmanuel Macron’s tax cuts in response to the Yellow Vest protests are lifting the economy just as the euro area slumps. They’ll amount to a stimulus of around 17 billion euros, or 0.5% of GDP. That’s on top of a one-off boost for businesses this year from changes in tax credits.
France isn’t the obvious candidate for belt-loosening in the euro area. With debt already near 100% of GDP, the national auditor has warned that Macron’s largesse has derailed efforts to repair the public finances from the last global crisis, and won’t leave much room if there’s another one.
France plans to resume tightening next year, with spending cuts and the removal of corporate tax-breaks, to get the deficit down to 2.1% of GDP. It’s hoping Germany will pick up the baton of fiscal stimulus, and has proposed a deal along those lines known as the “growth contract.” So far, Berlin hasn’t responded.