Thinking About Stimulus

My colleague Sylvain Schetagne prepared this Update on Economic Stimulus packages announced as of December 10.  Quite a few governments do seem prepared to act on the IMF recommendation to provide significant stimulus, but there’s a wide range of approaches.


Last November, leaders of the world’s 20th largest economies, know as the G20, met in Washington to discuss the serious challenges to the world economy and financial markets and agreed on solutions to be implemented rapidly to deal with this crisis. In the press release that came out of that meeting, the leaders agreed on a series of positions and actions to be implemented rapidly. Part of the solution was to “use fiscal measures to stimulate domestic demand to rapid effect…”

Many countries had already taken important measures to support the global economy and to stabilize the financial system before the meeting in November. Others have waited. The current memo attempts to document the fiscal stimulus taken so far by major countries to stimulate domestic demand. Due to language barriers, portraits of many countries are taken from secondary sources, which could limit the scope of the analysis.


The USA, with about 25% of world GPD, suffers. In November, 533,000 jobs were lost, the single worst month of job loss in over three decades. That puts the total number of jobs lost in the US recession at nearly 2 million.

In his radio address on the economy, on December 6th President Elect Obama proposed an economic recovery plan for both Wall Street and Main Street that will help save or create at least two and a half million jobs, while rebuilding infrastructure, improving schools, reducing US dependence on oil, and saving billions of dollars (

First, they will launch a massive effort to make public buildings more energy-efficient. The US government pays the highest energy bill in the world. An upgrade of federal buildings by replacing old heating systems and installing efficient light bulbs is needed. That won’t just save the American taxpayer billions of dollars each year. It will put people back to work.

Second, they will create millions of jobs by making the single largest new investment in their national infrastructure since the creation of the federal highway system in the 1950s. They will invest following a new simple rule – use it or lose it. If a state doesn’t act quickly to invest in roads and bridges in their communities, they’ll lose the money.

Third, they will will launch the most sweeping effort to modernize and upgrade school buildings that they has ever been seen. They will repair broken schools, make them energy-efficient, and put new computers in classrooms. Plus they propose to update their information superhighway to increase access to the internet (kids, schools and libraries).

They also propose to help modernize their health care system, implement cutting edge technology and electronic medical records so that they can cut red tape, prevent medical mistakes, and help save billions of dollars each year.

These are a few parts of the economic recovery plan that will be rolling out in the coming weeks with more to come in January. Investment to come: At least $1 trillion over a few years. It is difficult to evaluate what does that represent as a % of GDP since we are not able to evaluate the period covered by this plan.


The European Commission, representing countries that are worth about 31% of the world’s GPD, have proposed a US $256 B stimulus plan to boost growth and confidence among consumers and businesses (

The first pillar is a major injection of purchasing power into the economy, to boost demand and stimulate confidence. The Commission is proposing that, as a matter of urgency, member states and the EU agree to an immediate budgetary impulse amounting to € 200 billion (1.5% of GDP), to boost demand in full respect of the Stability and Growth Pact.

The second pillar rests on the need to direct short-term action to reinforce Europe’s competitiveness in the long term. The plan sets out a comprehensive programme to direct action to “smart” investment. Smart investment means investing in the right skills for tomorrow’s needs; investing in energy efficiency to create jobs and save energy; investing in clean technologies to boost sectors like construction and automobiles in the low-carbon markets of the future; and investing in infrastructure and inter-connection to promote efficiency and innovation.

The debate concerning a joint European stimulus package has led to sharp international tensions. In particular, German Chancellor Angela Merkel (Christian Democratic Union, CDU) has become the focus of criticism for her refusal to support a wide-ranging package of measures aimed at stimulating the economy (see:


Despite the debate, Germany’s upper house of Parliament, the Bundesrat, has passed a $44 Billion economic stimulus package, despite hefty criticism from a number of states. The package was approved by the lower house of parliament, the Bundestag. German Chancellor Angela Merkel said the rescue plan would secure one million jobs and boost consumption and investments across the country. (,,12215_cid_3853484,00.html?maca=en-en_nr-1893-xml-atom)


Meanwhile, France will spend US $33 billion over the next two years (about 0.6% of GPD per year) to soften the blow of the global downturn and limit the effects of increasing unemployment. Unlike previous efforts intended to stimulate consumption rather than investment, the plan includes aid to the country’s ailing auto industry, which employs 10 % of the French work force, and sets aside money for the construction industry. Seeking to bolster corporate balance sheets, the package also accelerates tax credits and rebates that are owed to companies, and speeds up infrastructure investment.


In the UK, the pre-budget report announced a US $55B economic stimulus plan that included: temporarily reducing the Value Added Tax (VAT) rate to 15 % with effect from December 1, 2008 to December 31, 2009; bringing forward £3 billion of capital spending from 2010-11 including introducing a green stimulus supporting low carbon growth and jobs; restricting the income tax personal allowance for those with incomes over £100,000 from April 2010, and introducing a new additional higher rate of income tax of 45 % for those with incomes above £150,000 from April 2011; increasing the employee, employer and self-employed rates of national insurance contributions by 0.5 per cent from April 2011; to offset the effects of the temporary reduction in VAT, increasing alcohol and tobacco duties, maintaining these increases after December 2009 to support fiscal consolidation; and following a fall in pump prices of over 20 pence per litre from their summer peaks, a two pence per litre increase in fuel duty from December 1 2008; and an additional £5 billion value for money target for 2010-11 and setting assumptions for spending growth from 2011-12 onwards.

Immediate action was announced to help those individuals and businesses most affected by the economic downturn: making permanent the £600 increase in the income tax personal allowance announced in May 2008 with a further increase of £130; bringing forward April’s increase in Child Benefit to January, increases of the Child Tax Credit and a payment of £60 to all pensioners equivalent to bringing forward the April increase in the basic state pension; help through mortgage rescue and Support for Mortgage Interest schemes for eligible homeowners in difficulty and a commitment from major mortgage lenders not to initiate repossession action within at least three months of an owner-occupier going into arrears; an additional £1.3 billion to continue delivering effective support for the unemployed to find a new job; measures to help small and medium-sized enterprises facing credit constraints, including a new Small Business Finance Scheme and a £1 billion guarantee facility

to support bank lending to small exporters; a new Business Payment Support Service to allow businesses in temporary financial difficulty to pay their tax bills on a timetable they can afford; and more generous tax relief for businesses now making losses and the modification of a number of planned tax reforms, including vehicle excise duty, air passenger duty, and the deferral of the increase in the small companies’ rate of corporation tax.



Italian Economy Minister Giulio Tremonti unveiled on November 28th 2008 a

US $3.2B stimulus package including tax breaks for companies and poorer households as well as measures intended to ensure banks keep lending to businesses.



In October Japan passed a US$18 billion extra budget to partially finance an economic stimulus package designed to help small businesses and consumers cope with the impact of fuel and commodity price hikes. The upper house of parliament approved the additional budget for the current fiscal year through March 2009, primarily to help fishermen and farmers who had been hit by soaring fuel prices earlier this year and to support small businesses and consumers. The extra budget is part of an US$117 billion emergency stimulus package drafted in August, before the global financial turmoil worsened in September.

In mid-November, Prime Minister Taro Aso announced the US $22B handout, part of an emergency package worth US $54.4 B. The government hopes it will encourage the public to spend, with Mr. Aso describing it as an antidote to “A harsh storm seen only once in 100 years.”


In a bid to boost its weakening economy, the Chinese Government has announced a US $586 billion stimulus package by 2010. It would amount to about 7% of the Chinese gross domestic product during each of the next two years. The stimulus package will be invested in key areas such as housing, rural infrastructure, transportation, health and education, environment, industry, disaster rebuilding, income-building, tax cuts, and finance.(


Australia’s government will follow up Saturday’s A$15.1 billion (US$10 billion) spending package with additional stimulus measures if growth slows more than expected. National and state leaders agreed on a five-year funding plan focused on education and health, following up A$10.4 billion in grants announced last month, as the country seeks to cope with the global financial crisis.


Other countries have also announced financial stimulus, see below. Only a few have not announced major economic stimulus package, like Canada.


Most major countries have announced economic stimulus package as of December 10 th 2008. Canada is falling behind despite major slowdowns and jobs lost in its economy. Too little to late… might be what will characterize the Canadian stimulus package to be announced on January 27, 2008.


  • Thanks for posting that Andrew.

  • The stimulus debate needs to take account of the massive global imbalances in current accounts of the balance of payments. For open economies, much of the stimulus is going to leak out into the world economy. The U.S. dollar is fragile, and could start to go down fast, leaving accusations of competitive devaluation to be screamed across the Atlantic or the 49th parallel. In Canada the conservatives want the dollar to fall, and oppose stimulus except of a minor sort. They have the ear of the government and want to get Iggy on board, via McCallum, the Bay St rep in the Liberal inner circle. Instead of thinking one year ahead we need to be thinking structural shift to public investment and ownership in the transportation sector, along the lines Andrew has suggested. This sets up a clear contrast to the do nothing but give us more tax cuts crowd surveyed by the ROB today. And we need a policy on fixing global imbalances, ie moving away from exchange markets and towards a new Keynes plan style not dependent on a national currency as the world money. Not simple to do, but the importance of trying to set out something will be become increasingly apparent as the economic situation worsens.

  • We need another Bretton Woods type international monetary intervention. The US will never go for it though, they love the fact that they can run deficits to infinity and never have their dollar drop through floor. Good thing they are not in some other country that the IMF or the World Bank holds hostage when deficits get a bit outside the accepted. We have no credibility with the South, of course we never did but the gulf between the North and the South is a lot deeper.

    Funny how all that works out huh.

    Great work Sylvain.

  • The economic stimulus package for the US seems to have long-term plans, which is better than short-term schemes like the rebate checks being released by IRS.

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