Deciphering the Fiscal Policy

The biggest fiscal expenditure programme in the history of the world is underway. Sweeping across 4 continents and pulling down political barriers, this swift, responsive and coordinated effort by governments around the world have led us to diverge away from what could have been the ‘greatest’ depression. Internationally coordinated efforts of governments have defended us from fallacies of the past; having taken lessens from Dr Keynes whose medicine of rapid and expansive fiscal expenditure has indeed worked again.

Even after the death of Keynes his legacy continues, along with it the debate surrounding his bequest. Many economists still doubt till date his policy of high government expenditure and especially in light of today’s already inflated fiscal deficits. Keynes had suggested that the government should take charge of the expenditure in times of collapse and forget the increasing deficit, which will take care on its own, once the economy is back on track.

The situation which government’s face today is indeed unprecedented. 

The success of the fiscal stimulus in the past is a motivation to spend, but the danger of over burdening itself with debt is more real and feasible this time around. 

Rather then bringing in investments, it might just scare away private investment by increasing interest rates and a subsequent lower sovereign credit rating. Currently it is expected that the stimulus package would run the economy and sustain markets till the end of next year. Governments are prudent to early withdrawal calls, with the Japanese crisis still in fresh memory.

Here is an idea of how much governments need to watch out next year as well, in the recovery stage.

Country	Fiscal Deficit (as % of GDP)
USA	9.70%
UK	13.30%
Japan	10.50%
India	8.40%
China	4.30%
Brazil	1.30%
Russia	5%

          Source: IMF Estimates for 2010

Thus it would make a good case to explain that why on earth, governments are willing to take so much of risk and are pumping in so much of money and if it would ever reach the desired targets.

For me an easy way to understand this would be to break down the decision making involving fiscal stimulus and focussing on different regions and nations to derive more sense from their decisions. Thus in simple lay man terms, I breakdown to what are the options available to the governments, why the fiscal stimulus has been so dominant this time, why some economists are sceptical about it and the dilemma of timing of withdrawal of taxpayers support.