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Messages from “Fiscal Space”

While many advanced economies increase government spending to unprecedented levels to mitigate the economic fallout of the COVID-19 pandemic, most developing countries have struggled to marshal even relatively small rescue packages. These differences reflect a systemic flaw in the global economy.

NEW DELHI – Among the many inequalities revealed by the COVID-19 pandemic, one of the most striking is the dramatic divergence in governments’ fiscal responses. Economic activity has collapsed worldwide as a result of lockdown measures to contain the coronavirus. But while some developed countries have been able to deploy fiscal stimulus on an unprecedented scale, most have not.

Since March, the US government has announced additional spending amounting to over 14% of GDP. In Japan, the figure is over 21%, compared to nearly 10% in Australia and around 8.4% in Canada. In Europe, lack of agreement on a strong joint stimulus effort has led to more varied responses, from additional spending ranging from 1.4% of GDP in Italy and 1.6% in Spain to 9% in Austria, with Germany and France in the middle, at 4.9% and 5%, respectively. Rigid EU budget rules continue to limit government spending in precisely those countries that need fiscal stimulus the most.

Meanwhile, monetary-policy responses have expanded the fiscal capacity available at sub-national levels of government in many advanced economies. By cutting interest rates, buying up municipal and provincial bonds, and introducing new lending facilities for specific sectors and enterprises, the US Federal Reserve and other major central banks have used all means at their disposal to keep borrowing costs low, and to maintain public agencies’ liquidity.

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