The G20 Disappoints on Policy
Robert Kahn, Steven A. Tananbaum Senior Fellow for International Economics
Bottom Line: At the Group of Twenty (G20) Summit in Hangzhou, China, leaders called for governments to do more to support growth, but offered little in the way of new measures. Quietly, and away from the G20 spotlight, fiscal policy is becoming more expansionary, but current policies are unlikely to provide a meaningful boost to growth or soothe rising populist pressures.
Fiscal Stances in G20 Countries
Last week’s Hangzhou communique disappointed observers hoping for a growth-boosting package of fiscal and structural reforms. Aside from cementing previous agreements on climate and tax compliance, there were no real economic achievements. A coordinated fiscal stimulus package from G20 countries, like in 2009, will not occur this year. Nonetheless, a careful look at the data shows a shift across the G20 countries toward larger fiscal deficits and, in a few cases, toward a more expansionary spending policy. Japan, China, the periphery of Europe, and some emerging markets all display this shift. Even in the United States, the fiscal squeeze of recent years has begun to ease. However, additional fiscal stimulus seems unlikely. Many countries remain hamstrung by high debt levels and gridlocked politics, and other countries, such as Germany, continue to resist using available fiscal space to boost European activity above its trend rate. As a result, global growth is likely to remain anemic.
The G20 Call to Action
Beginning in February, G20 finance ministers and central bank governors have called repeatedly for more aggressive growth-oriented policies in their communique:
"Over the last several years, the G20 has made important achievements to strengthen growth, investment and financial stability. We are taking actions to foster confidence and preserve and strengthen the recovery. We will use all policy tools—monetary, fiscal and structural—individually and collectively to achieve these goals. Monetary policies will continue to support economic activity and ensure price stability, consistent with central banks’ mandates, but monetary policy alone cannot lead to balanced growth. Our fiscal strategies aim to support the economy and we will use fiscal policy flexibly to strengthen growth, job creation and confidence, while enhancing resilience and ensuring debt as a share of GDP is on a sustainable path."
This message has been reinforced by the International Monetary Fund (IMF) and other international organizations with increasing urgency and anxiety as the year has gone on, most recently in the IMF’s report for the G20 summit. Observers have scrutinized each G20 statement for evidence of policies that would match the G20’s words. Time and again, those wishing for growth-oriented policies have been disappointed. Still, looking across the G20, in most cases fiscal policy has been easing in practice (both compared to last year and to forecasts for 2016 made at the start of the year), in some cases substantially. This easing occurred through allowing larger deficits (Canada and the United States), reducing surpluses (Germany), or delaying planned deficit reduction (France, Italy, and Japan). The exceptions include Latin America and Russia, where domestic pressures are forcing consolidation. Although the weakening in fiscal policy has been the autonomous result of a weaker global outlook (what economists call automatic stabilizers) in some cases, part of the loosening is the result of specific policies that will have a sustained impact. Read more »