2009/SOM2/FMP/SFOM6/010 Session: 2 Will Asian Fiscal Stimulus Packages Stimulate Growth Purpose: Information Submitted by: Asian Development Bank 6 th Senior Finance Officials Meeting Singapore 17-18 July 2009
Session 2: Fiscal Priorities Beyond the Crisis Will Asian fiscal stimulus packages stimulate growth? Prepared for APEC Senior Finance Officials Meeting 6 (SFOM-6) Singapore Office of Regional Economic Integration 17-18 July 2009 Contents 1. Will Asian fiscal stimulus packages stimulate growth? Asia Development Outlook 2009, www.adb.org/economics/
Will Asian fiscal stimulus packages stimulate growth? The severity of the global economic downturn since the fourth quarter of 2008 has prompted most governments in Asia to draw up fiscal stimulus measures in an attempt to stem the decline in domestic economies and to eventually drive growth higher. The possible impact of these measures on the gross domestic product (GDP) of these economies can be assessed through a macroeconomic simulation. A CNY4 trillion ($586 billion) fiscal package was announced by the Government of the People s Republic of China (PRC), which included projects already planned before the economic slowdown. This package covers spending on infrastructure and housing, as well as for social development such as health care. Tax cuts and additional spending, mostly for infrastructure, was included in a W33 trillion ($25 billion) fiscal stimulus package passed by the Parliament in the Republic of Korea. In addition, the 2009 Korean budget earmarks W24.7 trillion for infrastructure investment, up 27% from 2008. More than 60% of all budget spending is to be disbursed in the first half of 2009. Extra financial support for low-income families also was announced. In India, the Government raised its expenditure by Rs800 billion in the fiscal year ended March 2009, with an emphasis on infrastructure investment and a reduction in the valued-added tax. A substantial increase in expenditure is planned for the fiscal year ending March 2010, together with cuts in excise duties and service taxes. Malaysia rolled out two stimulus packages totaling RM67 billion ($18 billion) to support employment and families, to fund infrastructure, and to encourage private investment. Thailand is implementing a B117 billion ($3 billion) stimulus package that includes tax cuts and cash assistance to low-income households. It plans to invest B2 trillion ($56 billion) mainly in infrastructure over 4 years, but that is yet to be approved by the Parliament. Elsewhere in Southeast Asia, the Philippines designed a P330 billion ($6.9 billion) fiscal package for spending on infrastructure and social programs to alleviate the impacts of its economic slowdown. Spending is intended to be fast-tracked in the first half of 2009. Similarly, Indonesia announced a Rp73.3 trillion ($6 billion) package focused on tax cuts, infrastructure projects that should generate employment, and assistance for those hurt most by declines in incomes. The 2009 budget for Singapore, which faces a deep economic contraction this year, included a Resilience Package amounting to S$20.5 billion ($13 billion). It is targeted at preserving jobs, buttressing bank lending, shoring up firms cash flows, and supporting households. Economies in both Hong Kong, China and Taipei,China are also forecast to contract in 2009. The former provided HK$24.1 billion ($3.1 billion) of fiscal stimulus in its 2009 budget, largely for tax concessions aimed at low-income households. The latter allocated NT$605 billion ($17.5 billion) to be spent over 4 years and targeted at generating 200,000 extra jobs by 2012. Shopping vouchers valued at NT$3,600 (about $100) were handed out to all citizens early this year to promote consumption.
Measuring the effects of Asia s fiscal stimulus packages To measure the impact of fiscal stimulus packages on selected developing Asian economies, Oxford Economics ran a simulation using its global macroeconomic model (Oxford Economics 2009) that treats government spending exogenously. 1 Assuming that the planned spending is in fact implemented, the model estimates changes in output levels relative to the baseline forecasts. Assessing the effectiveness of the fiscal measures requires comparing the size of the packages (in relation to GDP) with the estimated impacts on output. The box table compares the estimated size of the multiplier (i.e., the estimated extent of output increases) relative to the size of the fiscal package. These results depend heavily on assumptions underlying the simulation. In the PRC, for instance, the simulation assumed that only about 30% of the announced fiscal package is likely to be new spending. Thus, GDP is expected to rise by just 1.3% in 2009 and 2.0% in 2010. However, if it is assumed that 50% of the package is fresh funds, the impact on output increases to 2.2% in 2009 and 3.4% in 2010. Furthermore, other government policies, such as steps taken to encourage bank lending not included in the simulation, will have an impact on GDP growth. The estimated impact on output in Thailand is much more significant than in the rest of the developing Asian economies, assuming the huge infrastructure spending that is under consideration is actually implemented. This spending has not been approved by Parliament and, if it is approved, spending will likely fall short of the target. Assuming that only half the package is actually disbursed, 2009 GDP would increase only by 3.7%. In the Philippines, the planned stimulus package is projected to raise output by over 2% in the next 2 years. If spending falls short as a result of funding or other constraints and 50% of the announced package is implemented, the impacts on GDP would moderate to 1.4% and 1.9% in 2009 and 2010, respectively. The ultimate impact on economies will depend on a variety of factors. The degree of openness to trade is a key determinant in fiscal policy effectiveness: in an economy as open as Singapore, for example, much of the fiscal stimulus will leak to other economies. A country s debt position is important if its fiscal stimulus requires much higher levels of government borrowing. A serious deterioration in fiscal and debt positions could prompt a downgrade in a country s credit rating, raising its cost of funds. Financing additional public spending could crowd out the private sector s access to funds. Moreover, while the intent to boost spending is clear, many governments face constraints that hamper implementation. These include constraints in funding and in institutions public agencies in developing economies often lack the capacity to plan and implement large spending projects in a timely way. In designing fiscal policy responses to the global downturn, governments must take these considerations into account. 1 The model covers 44 advanced and emerging economies and six regional trading blocs. Among the emerging economies included in the model are 10 from developing Asia: People s Rep. of China; Hong Kong, China; India; Indonesia; Rep. of Korea; Malaysia; Philippines; Singapore; Taipei,China; and Thailand. The model, which is updated on a monthly basis, uses the most recent historical data of key macroeconomic variables as well as baseline forecasts for the next 5 years. The February 2009 model release was used for the simulation.
Impact of fiscal stimulus packages in developing Asia (simulation) Economy Package as share of Impact on GDP (% change from baseline) 2009 GDP (%) 2009 2010 2011 China, Peop le s 1.2 1.3 2.0 1.5 Hong Kong, China 1.4 1.1 0.5 0.3 India 1.6 0.5 0.3 0.3 Indonesia 1.3 1.3 0.8 0.4 Korea, Rep. of 2.5 1.6 1.2 1.0 Malaysia 2.6 3.1 4.1 1.5 Philippines 4.1 2.4 3.5 1.7 Singapore 5.9 3.6 2.8 0.4 Taipei,China 2.1 1.4 1.2 0.7 Thailand 6.4 6.5 7.9 7.4 Source: Oxford Economics. 2009. Emerg ing Asian Fiscal Policy: A Limited Boost, but China Could Yet Do Mor e. Emerging Markets Weekly, 16 March.