COMPARING STIMULUS PLANS ACROSS THE G20

With interest rates close to the zero, many countries have turned to fiscal stimulus to prevent their Gross Domestic Product from declining further. Almost all of the G-20 countries have announced some type of plan to get their economies back on track. However, despite their common goal, there are several differences between their policies and the upcoming years will show which ones will fail or succeed.

United States

On February 17, 2009, U.S. President Barack Obama signed into law a $787-billion stimulus package. The size and time range (10 years) of the stimulus has caused a lot of controversy among the U.S. society and lawmakers as public debt is likely to grow significantly  in the next few years. Yet, the largest part of the stimulus is made of long term investments and regardless of how divisive the plan is, without any doubt it will bring relief to many distressed households and businesses. In fact, tax provisions and transfers for state and local governments are likely to boost the economy in the short run and investments in infrastructure, renewable energy, health care and technology for sure will have a positive effect in the long run. It is estimated that in 2009 the stimulus will account for almost 2% of the GDP and the total expenditure over 10 years may reach as much as 6% of GDP.

Japan

So far, Japanese lawmakers have introduced three stimulus measures. The first proposal was initiated in August 2008 and was aimed at helping businesses and consumers to cope with soaring fuel and commodity prices. The second stimulus was brought into light in December 2008 and was intended to bolster the world’s second-largest economy by spending billions to create jobs, increase business loans and help laid-off workers.

The last ¥56.8 trillion (11.2% of GDP) plan, with ¥15.4 trillion (3.0% of GDP) in direct stimulus is expected to provide a direct boost to GDP growth. The plan includes ¥1.6 trillion for investment in low carbon technology, including putting solar panels on schools and ¥370 billion of incentives to scrap old cars. Consumers will receive tax breaks worth as much as $2,500 on purchases of “green” cars, as well as subsidies of 5 percent on energy-efficient televisions and other appliances. Moreover, the stimulus contains ¥1,9 trillion worth of measures to create jobs; ¥2 trillion for health and childcare; and wide range of support for industries from agriculture to tourism. The stimulus also raised the amount that a parent can give a child without incurring inheritance tax to ¥5m until the end of 2010, provided the money is used to buy a home.

The stimulus is still under debate as its causing a lot of controversy especially in the opposition-controlled Upper House which calls it wasteful spending. Indeed, Japan’s public debt is one of the highest in the world relative to GDP because of repeated fiscal stimulus packages in the 1990s.

Australia

The Australian government has so far initiated two fiscal stimulus packages. The first, worth A$10.4bn or 1% of GDP, was announced in October 2008 and was aimed at pensioners and parents. The stimulus included A$4.8bn for Australia’s 4m pensioners and A$3.9bn for middle and low-income families. The one-off payments to the less well-off was made in early December and provided a boost to consumer spending in the run-up to Christmas. A further A$1.5bn has been made available as an incentive for first-time home buyers, while A$187m will help create an extra 56,000 training places in the 2008-09 financial year.

A second stimulus was passed by the Australian parliament in February 2009. The package, the largest in Australia’s history, is worth A$42bn ($27bn), which accounts for 2% of GDP in 2009 and 1.3 % in 2010. It includes about A$12.7bn in cash payments to workers and families as an immediate economic stimulus, plus A$29bn for longer-term infrastructure projects. About half of the Australian population will receive the new payments, stimulus checks amounting to $950 per child were sent to 1.2 million families, while an additional 1.5 million received $900 checks. The government hopes that giving cash to low- and middle-income workers, as well as families with schoolchildren, will help to revive the economy.

Canada

Canada's Conservative government has initiated a C$40bn ($35.5bn) stimulus package at the end of January 2009. The stimulus spending will come in at 1.9 % of GDP for 2009 and another 1.4% for 2010. The measure includes C$20 billion in a personal income tax relief over 2008–2009 and the next five fiscal years (7.5% increase in the basic personal tax exemption , as well as a corresponding increase to the upper limits of the two lowest tax brackets) and a long-term business tax reductions with the general corporate tax rate reduced to 19% as of January 1st, 2009. To revitalize the moribund construction industry, Ottawa has committed a total of $7.8 billion over two years to the housing sector. The most expensive measure, a one-year Home Renovation Tax Credit worth up to C$1,350 per home, is expected to cost the government C$3 billion in the coming fiscal year. Infrastructure spending will account for nearly a third of all stimulus spending, totaling C$12 billion in all. Moreover, Canadians who have lost their jobs are eligible for an extra five weeks of Employment Insurance and workers who agree to a reduced work-week as part of a job-saving action are now eligible for EI benefits through new work-sharing rules. Sectors of the economy that are particularly hard hit by the deterioration of our export markets – including the automotive, forestry and manufacturing sectors – are receiving C$7.5 billion in transitional support. In addition, the government is also investing C$8.3 billion in a skills and a transition strategy that will help unemployed Canadians learn the skills they need to find jobs in the new economy.

China

In November 2008, China announced a 4 trillion Yuan stimulus package, the largest in the country’s history. It is estimated that the stimulus will account for 3% of GDP in 2009. And if we add a new push to bank-financed infrastructure, the spending may reach 4% of GDP. More importantly,  70% of the stimulus funding is supposed to come from non-central sources, such as local governments and bank lending. As of April 30, 230 billion Yuan of new funding from the central government had been spent. Table below shows how China has allocated its stimulus spending.

China has been much criticized for focusing its stimulus on investment, rather than consumption. However, in the short term this is the quickest way to boost domestic demand. The main evidence that the 4 trillion Yuan stimulus package is producing results has been a 30 percent surge in urban fixed-asset investment from a year earlier and a jump in industrial output in the first four months of this year. Moreover, banks, prompted by government orders, are extending loans; M2 money supply is growing at a record pace. Also, China plans to boost welfare spending by 29 percent and is giving 20 billion Yuan in subsidies this year to help rural residents buy televisions, fridges and other electrical appliances. More outstandingly, the world’s most populous nation is trying to rebalance the economy by improving welfare and health care to give Chinese the confidence to spend. The State Council issued in April an 850 billion Yuan health-care plan, including building at least one hospital in every county and expanding medical insurance coverage to 90 percent of the population.

In May, China's National Audit Office also made assessment of the stimulus plan, this time checking its effectiveness on boosting the economy. The auditors reveled that though 94% of the funds from the central government were in place for 335 new projects, supplementary funds to bring the projects to completion were only 48% in place. As a result, some projects are unfinished, while others have been delayed. The report disclosed that there are funding delays and not enough stimulus for small- and medium-size enterprises. The auditors also said some banks at the local or branch level aren't conducting adequate due diligence. The audit found some companies that applied for bill financing had put the funds into bank deposits to profit from interest-rate differentials rather than use the money for short-term working capital.

United Kingdom

Shockingly, the British government has announced only a £20 billion ($28 billion) stimulus package. Indeed the U.K. stimulus is only about 1.4% of GDP, despite the fact that its government budget deficit is expected to reach as much as 11% of GDP this year. The difference is mainly due to £1.3 trillion that the British authorities have been spending to bail out the financial system. Initiated in November 2008, the fiscal stimulus has been heavily reliant on a temporary reduction in a levy on sales known as the Value Added Tax, to 15% from 17.5%.  Yet, the stimulus also included additional support for low- and middle-income taxpayers reflected mainly in £145 reduction in taxes for basic rate taxpayers. The package established as well a new Lending Panel to improve monitoring of lending to households and businesses and provide help through mortgage rescue and support for Mortgage Interest schemes to eligible homeowners in difficulty. Moreover, the stimulus provided an additional £1.3 billion to continue delivering effective support for the unemployed to find a new job and new skills. In addition, measures to help small and medium-sized enterprises facing credit constraints were established, including a new Small Business Finance Scheme to support up to £1 billion of bank lending; a separate £1 billion guarantee facility to support bank lending to small exporters; a £50 million fund to convert businesses’ debt into equity; and a £25 million regional loan transition fund.

Germany

So far, Germany has announced two stimulus packages. Both measures amount to over 1.25% of GDP in 2009 and another 0.5% of GDP in 2010. The first €23 billion ($29 billion) package was approved in November 2008 and projected to be finance over four years, with €10.5 billion coming out of the federal budget and the rest from state authorities. The plan has included tax breaks on purchases of cars, loans to small and medium-size businesses, money for roads and subsidies for certain household repairs, especially those enhancing the energy efficiency of buildings. Indeed, €2,500 incentive to trash cars more than nine years old and buy new ones resulted in the 40% increase in car sales in the first quarter of 2009.

On 2 March 2009 the German Parliament adopted €50 billion "Pact for employment and stability in Germany". The main objective of the second stimulus package is the extension of the credit and guarantee program offered by German KfW bank, a development bank owned jointly by the Federal Republic (Bund) and the states (Länder). Under the program, KfW will guarantee up to 80% of the loan value to businesses which find it difficult to obtain credit from private banks. A total of  €100 billion has been earmarked for such guarantees. The new measure offers as well a simplification of the public procurement process for building work and services planned for a limited period of time by temporarily raising the entry for awarding of contracts without public invitation to tender and invitations to tender made to a limited group of companies. Also, the stimulus extends the €2,500 incentive to encourage car sales. In addition, in order to avoid lay-offs program facilitates the possibility of so-called „short-time“ work. The compensation for such work will be paid by the Federal Employment Office for a period of up to 18 months. Companies shall use this short-time work to invest in the qualification of their workforce and will receive subsidies for advanced training and education of their employees. There will be also tax cuts (the lower tax rate will be reduced from 15% to 14%) and a reduction in the contribution rates for health care, both worth around €9 billion. What is problematic about this package is that most of the stimulus will become effective only in the second half of this year: the tax break will come into effect on July1, 2009 and it is expected that the infrastructure measures will show any significant impact only by the end of 2009.

Russia

The Russian government has so far announced two stimulus packages. The first RUB550bn ($20bn) measure was brought into the light in November 2008 and aimed at increasing disposable income for consumers and business. The main component of the package was cut in the profit tax rate from 24% to 20%, estimated to cost RUB400bn. The stimulus also included more than 30% hike in the unemployment benefits (RUB20bn), 50% increase in pensions throughout 2009 and 2010 and tax deductions for property purchases. Moreover, the government decided to allocate RUB50bn on defense spending in 2008–09 in order to avoid bankruptcies of enterprises in this sector. In addition, the authorities decided that infrastructure projects would be financed by companies through the issuance of infrastructure bonds guaranteed by the government and VEB (the state development bank).

The second stimulus package was initiated in April 2009. The plan offers RUB3 trillion ($90bn) of which almost 20% is for consumers, including social welfare for the elderly and young families. The plan also covers tax cuts, hefty loan guarantees for commercial banks, as well as government subsidies for military industries. According to the Prime Minister Putin spending for the elderly will rise 18%. The government also will loosen rules on how mothers can spend baby bonuses that the government provides for the birth of a second child. So far, the awards of about $9,000 has been restricted to use in making mortgage payments and at stores selling products for children, but the government relaxed them to allow mothers to make car payments.

 India

So far, the India government announced two stimulus packages. First 200 billion rupees ($4.1 billion) plan was brought into light in December 2008. The plan aimed at increasing the development expenditure, easing of funds availability for infrastructure and providing cheaper credit for housing and labor-intensive exports. Indeed, package included nearly $1.5 billion credit window for smaller businesses, to be handled by the Small Industries Development Bank of India, and a nearly $1 billion refinance option that will be handed out by the National Housing Board. To boost consumer spending in sectors such as autos, cement, and textiles, the government lowered it Central Value Added Tax on all products, excluding petroleum, by 4%. The government also dropped gas and diesel prices, already subsidized by the state, by 6% and 10%. In addition, in January 2009, recognizing the housing sector’s potential to boost employment and demand for critical sectors, the government announced a package for borrowers of home loans. Under this scheme, new home loan borrowers had been offered home loans at a fixed interest rate for a period up to 20 years with loans up to Rs 500,000 at 8.5% and loans between Rs 500,000 and Rs 2,000,000 were extended at 9.25%. Moreover the bank had also revised margin money and waived off both processing fee and pre-payment charges for loans under this scheme.

In July 2009, second measure was announced, providing resources to boost domestic demand, with tax cuts, and spending increases on the rural sector and infrastructure. Tax cuts would include personal income tax reductions, abolishment of the Fringe Benefit Tax on businesses that stifled business in recent years and a tax holiday on natural gas and other energy sources. The infrastructure spending consists of an increase of 23% for highway improvements and build-outs, an increase of 87% for the National Urban Renewal program, and an increase of 45% for the Bharat Niram Infrastructure Project.