The US stimulus is the talk of the town


The US stimulus is the talk of the town

While the IMF and OECD have endorsed looser fiscal policy to aid the recovery, the vast scale of stimulus planned in the US goes much further than most had envisaged.

September 26, 2021

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The US stimulus is the talk of the town. Where’s ours?

A UK think tank has stated that Britain needs to “act big” and “boost it like Biden” with a £190bn fiscal stimulus in order to restart the economy and avoid long-term stagnation. At present, the UK is planning a much smaller fiscal boost over the coming year than that under way in other countries, even though its economy has been hit harder than most by the pandemic, according to analysis by the Institute for Public Policy Research.

Chancellor Rishi Sunak has so far committed the government to additional spending of £40bn, equivalent to around 2 per cent of gross domestic product in the next fiscal year relative to pre-pandemic plans, IPPR said. Germany plans to spend almost twice as much, relative to the size of its economy, in the same period. Canada could spend between 3 and 4 per cent of GDP, although the timing is less clear.

But these countries’ plans are dwarfed by the new US administration’s proposals for a $1.9tn stimulus package worth almost 9 per cent of GDP over the coming year or a chart topping 13% in Japan. IPPR argues that the UK needs to launch a stimulus package on a similar scale to the US — worth £190bn, or 8.6 per cent of GDP in 2021-22 — to avoid a vicious cycle of business bankruptcies, lay-offs and depressed demand.

It calculates this as the amount of extra spending needed to lift the UK economy back towards its full potential, and argues that it should be directed towards pandemic-related spending, an extension of job and income support schemes and help for businesses and public investment. “The risk of doing too little far outweighs the risk of doing too much. Joe Biden has understood this. Rishi Sunak should follow his lead,” said Carsten Jung, senior economist at IPPR.

But while the IMF and OECD have endorsed looser fiscal policy to aid the recovery, the vast scale of stimulus planned in the US goes much further than most had envisaged. The Biden proposals have split opinion among economists, with some previously outspoken proponents of fiscal stimulus underlining the risks of pumping up demand too far and unleashing inflation.

Stimulus on a similar scale would be even more contentious in the UK, which has a history of higher inflation and less slack in its labour market than in the US. But Jung said inflationary risks should be lower in the UK because its economy had been harder hit and was still running much further below potential than the US economy. Given low borrowing costs, government debt could end up lower as a share of GDP as a result of the package, he argued, if it led to a faster recovery and lower borrowing in future years.

So, do we ‘boost it like Biden’ or shy away like Sunak? Can’t the answer, as always, be somewhere in the middle of two extremes? If Germany are looking at spending around 4% of GDP, we should at least be matching that given we are dealing with Post-Brexit uncertainty on top of the global pandemic. Austerity can wait for another day.

We need to get our economy stabilised and the current yield on a 10 year UK government bond is a little over 0.6%. During the financial crisis of 2008, it was over 5%. Borrowing has never been cheaper and for us, it’s even less than for the US, yet we are holding fire in a very British way. I hate to bring back the overused phrase of the Greek debt crisis, but I think this is a good, and perfectly justifiable time to ‘kick the can down the road’.

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