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Govt stimulus must ease consumer fears

Govt stimulus must ease consumer fears
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First Published: Sun, Dec 07 2008. 09 59 PM IST

Updated: Sun, Dec 07 2008. 09 59 PM IST
In normal times governments should not even think of reviving a flagging economy with fiscal stimulus. The times are not normal.
Global recession is forming, deflation threatens, monetary policy in the US is already flat out. Belatedly, Europe’s central banks are rushing to join the anti-deflation fight.
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The question for governments is how best to second the monetary effort. They are not coming up with the right answers. And at present the unhappy irony is that fiscal stimulus is most prevalent where it can least be afforded.
Gordon Brown, the UK prime minister has become the pied piper of stimulus. But most of the £20 billion (Rs1.46 trillion), more than 1% of gross domestic product (GDP), conjured by the UK government last week was allocated to cutting value added tax, a sales tax, by 2.5%: a meaningless incentive to consumer spending when retailers are unsuccessfully offering discounts 10 times greater. Government stimulus measures must ease consumers’ fears by reducing the income tax they pay and by providing employment.
The US, too, is seeking to rescue an economy pervasively over-stimulated by a house price bubble and now devastatingly deflated by a house price bust. There can be little doubt that Barack Obama, the next president, will enact what would be a second sizeable stimulus package— and in so doing could easily double the US budget deficit to over 6% of GDP.
It is a bad position for the incoming president to be in. But Obama would do well to use his prestige as a newly elected leader to persuade countries that have profited from American (and British) profligacy in recent years to offer some global help now.
The US and the UK have consumed and imported, beyond their means. Germany and China have produced and exported. German consumers, meanwhile, have spent cautiously, following years of reform in which wages and benefits were pared back.
There has been no housing boom in Germany. The government has achieved a budget surplus. Domestic demand has been idling.
To help keep Germany’s recession shallow and to bolster the global economy, Germany needs to press the domestic demand accelerator now. But its chancellor Angela Merkel has so far resisted stimulus. Her government points to measures already taken worth barely more than 1% of GDP. But it could, and should, do much more. Income tax cuts that would buoy the spending power of German consumers would make sense.
China, concerned that its growth may slow from double-digit rates, does see the need for stimulus—and, like Germany, is well placed fiscally to afford it. The government announced last month a plan worth an enormous $600 billion, to be invested primarily in constructing infrastructure, and is said to be considering further measures.
What China fears is a rise in unemployment and putting government money into construction is a good way to avoid that.
It is jobs that should be the global stimulators’ focus. A mass rise in unemployment around the world could turn global recession into global slump.
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First Published: Sun, Dec 07 2008. 09 59 PM IST