The Hindu Business Line : 2019-08-13

BANKING : 8 : 8


CHENNAI BANKING 8 BusinessLi­ne TUESDAY AUGUST 13 2019 • • WX ZY SRINIVAS ACHARYA Managing Director, Sundaram Home YZ Central banks cry for budget support, but only some are getting it control of Congress, and, therefore, the purse strings, as of this year. America has a debt ceiling that has to be increased before spending can rise, and there is usually a political row. The latest one just got resolved, in a deal that suspends the ceiling for two years and edges spending higher. But there is little incentive for Democrats, who want to beat Trump in next year’s presidenti­al election, to juice the economy in ways that might help him. borrow – in many cases, investors end up paying them, since yields are negative. All kinds of economists, including the ones at the Internatio­nal Monetary Fund, agree that fiscal support is probably the way forward. gets less attention than central banks. Following is an overview of the fiscal state of play in the world’s most important economies, what government­s are doing, and what they are talking about doing. spending cuts and the removal of corporate tax-breaks, to get the deficit down to 2.1 per cent of GDP. It is hoping Germany will pick up the baton of fiscal stimulus, and has proposed a deal along those lines known as the growth contract. So far, Berlin hasn’t responded. Germany, is obsessed with balanced budgets. late which countries have fiscal space, Germany is usually top of the list, and it’s likely the main target of ECB chief Mario Draghi’s increasing­ly loud demands for some spending support. But the government brushes off such calls. The public argument is that current economic problems are not too severe yet, and are global in nature anyway. Behind the scenes, finance ministry officials are wary that a deep slowdown could be on the way – and their mantra is that Germany needs to keep its fiscal powder dry so it can pull itself, and maybe all of Europe, out of a recession. has had to compromise over budget targets to avoid giant fines. The populist government in Rome may yet have some cards to play, though. It is seeking to avoid implementi­ng an already legislated sales tax increase next year, while speeding up cuts in income and corporate tax rates, and leaving income-support and early-retirement programmes intact. To avoid another blow-up with Brussels, the government may have to consider taking away a host of tax breaks enjoyed by various groups, which won’t make voters happy. And it has a couple of other avenues for raising revenue like squeezing more dividend payments out of stateowned companies, and extending a crackdown on evasion that has already netted settlement­s from UBS and the Gucci fashion empire. ANALYSIS France BLOOMBERG President Emmanuel Macron’s tax cuts in response to the Yellow Vest protests are lifting the economy just as the euro area slumps. They will amount to a stimulus of around €17 billion, or 0.5 per cent of GDP. That’s on top of a one-off boost for businesses this year from changes in tax credits. France is not the obvious candidate for belt-loosening in the euro area. With debt already near 100 per cent of GDP, the national auditor has warned that Macron’s largesse has derailed efforts to repair the public finances from the last global crisis, and won’t leave much room if there’s another one. France plans tightening next August 12 As they look to ease monetary policy, central bankers are also singing from the same song sheet when it comes to government support for their economies. They want more of it. With the global growth outlook darkened by trade wars and borrowing costs already low, central banks say they can’t dispel the clouds on their own. From US Federal Reserve Chairman Jerome Powell to European Central Bank President Mario Draghi, the demands are mounting for government­s to loosen their budgets if the slowdown takes hold. Markets are flashing a green light. It has rarely been cheaper for government­s to United States What about fiscal policy? The US has been loosening fiscal policy under President Donald Trump. His combinatio­n of tax cuts and higher spending is unorthodox in an economy that has been expanding for a decade. It did deliver a bump in growth last year, which is now fading. It also left the US looking a bit like Japan a few years earlier – with a deficit above 4 per cent of GDP and forecast to stay there for a decade. Markets seem to be fine with the Trump stimulus. The president’s problem is that he has no easy way to repeat the trick. His Republican Party lost The questions are: which finance ministries have room to help and which are listening? It’s harder to track fiscal stimulus than the monetary kind. There are more instrument­s, with taxes and spending split across national or local levels that are hard to condense into a single number. (And different calculatio­ns can produce different results; here, IMF numbers are used throughout). The greater complexity is one reason why fiscal policy, while critical to understand­ing the economic outlook, Germany The German government’s own numbers show the budget in perfect balance for a sixth straight year as it’s constituti­onally required to be, outside of recessions. (The IMF calculates that it’s actually in surplus.) Zero deficits have been a hallmark of Chancellor Angela Merkel’s government, and not one that’s likely to be abandoned easily, even as economic sentiment at home worsens and external pressure grows. When analysts calcutry, Eurozone Europe is hobbled before it comes to the fiscal starting line, because there is no authority parallel to the ECB that can tax and spend on the continent’s behalf – while individual members lack the flexibilit­y that comes with printing your own currency. Plus, the most powerful coun- Italy Italy, with a long-stagnant economy, wants to kickstart growth by widening its deficit, but it’s run up against EU rules. Twice in six months, it to resume year, with