Fiscal policy: A woman walking past the headquarters of the People’s Bank of China in Beijing. China is expected to increase its fiscal stimulus but will be constrained by its total debt of 300% of GDP. — Reuters
WITH many countries facing limitations in monetary easing policies, eyes are turned to large fiscal or government spending to help stimulate rapidly slowing economies.
But fiscal stimulus can also be limited for many countries that have overspent and worse still, are already heavily in debt.
In fact, the possibility of a fiscal crisis has been identified as the biggest risk to doing business globally in the next 10 years, a survey of 12,897 World Economic Forum business leaders showed.
In the face of fragile global growth, business leaders are “deeply concerned” by their governments’ fiscal resilience.
Many governments are embarking on deficit spending. The original Keynesian idea was governments must step in with deficit spending when there is demand deficit in the economy.
Deficit spending these days has become permanent, in the belief it is harmless so long as total debt as a percentage of gross domestic product (GDP) stays within a controlled level, said Inter-Pacific Securities head of research Pong Teng Siew.
Once debt levels become unsustainable, it would be difficult to address the problem over a short period of time, as in the case of Malaysia.
“Malaysia has no room to undertake any bond buying stimulus or drive interest rates to sub-zero levels; it is forced to spend within its means, ’’ said Pong.
Monetary and fiscal interventions, and private sector backstops used after the 2008 financial crisis cannot be deployed to the same effect today.
Financial sector bailouts will be intolerable in countries with resurgent populist movements and near-insolvent governments.
Among the risks that can trigger a recession in 2020 include wars in US-China trade and technology, political tensions and high levels of debt.
“The shock to markets would be sufficient to bring on a global crisis, regardless of what central banks do, ’’ said AmBank Research head Dr Anthony Dass.
Further escalation would tip the world into a recession; another financial crisis would likely follow, given the scale of private and public debt.
The US fiscal deficit, the shortfall in the government’s income compared with its spending, passed the US$1 trillion mark in September compared with an adjusted US$878bil a year earlier.
Total US national debt exceeds US$22 trillion, a record high.
European Central Bank president Mario Draghi has repeated his call for governments to “loosen their purse strings” to support current loose stimulus and boost flagging eurozone economies.
Government spending must play a greater part in bolstering eurozone economies, even if it means incurring bigger fiscal deficits, said former International Monetary Fund chief economist Olivier Blanchard.
Governments in South Korea and Indonesia that have relatively low public debt compared to peers worldwide, are planning record spending next year.
But fiscal space is limited by fiscal and current account deficits, as in the case of India and Indonesia.
China is expected to increase its fiscal stimulus but will be constrained by its total debt of 300% of GDP.
Japan is looked upon to boost government investments. A relatively small 2.5% budget deficit could allow that, and a steadier and stronger growth could contribute to reducing Japan’s huge public debt, said a CNBC commentary.
With a budget surplus of 2.3% of GDP, Germany is deemed to have “plenty of space” to stimulate its moribund economy.
But German Finance Minister Olaf Scholz said that so far, it’s just slower growth; Japanese Finance Minister Taro Aso said Japan is “not facing such a situation that stimulus should be taken.”
With the increasingly dire global outlook, the risk of private companies becoming dysfunctional is rising.
This is a thorny issue, as global monetary authorities are now less comfortable with the ultra-accommodative monetary stance that many of them adopted during the financial crisis, said Malaysian Rating Corp associate director, economic research, Nor Zahidi Alias.
Side effects from such an approach include the formation of asset bubbles and other imbalances such as surging home prices and high household indebtedness.
Constraints in fiscal space due to large budget deficits and high debt levels, coupled with limitations in monetary stimulus, can pose a setback for support to the global economy, said Socio Economic Research Centre executive director Lee Heng Guie.
Against existing low rates, the Fed may also be limited in using monetary policy to counteract uncertainties caused by trade wars.
For the coming recession, most countries have enough reserve spending power to lift their economies from the slump. By the next recession, most will have exhausted all monetary policy room and fiscal flexibility.
With the US social security facing impending insolvency, pensioners may get a shock with nothing to claim by the next recession which could be “well within our lifetime.”
Columnist Yap Leng Kuen sees danger in overspending in the face of high debts. The views expressed are solely that of the writer.
