INVESTMENT IN infrastructure will have far more impact than tax cuts for governments trying to boost economic growth in the face of the global recession, according to the International Monetary Fund (IMF).
In its most recent assessment of the global financial crisis, the IMF said the stimulus packages announced so far would probably add between 0.4 per cent and 1.3 per cent to growth this year across the world’s big economies.
With the IMF predicting global growth to slow to just half a percentage point in 2009, this suggests government spending boosts and tax cuts are the only measures keeping the global economy from an outright contraction.
The IMF, which has urged faster and bigger restructuring plans for the financial system, also broke a taboo by calling for limited and temporary nationalisation of troubled financial institutions when shareholder equity has been wiped out.
Estimates of the so-called “fiscal multipliers” – the eventual effect on gross domestic product of a given tax cut or increase in government spending – showed that infrastructure investment would add between 0.5 per cent and 1.8 per cent to output per 1 per cent of GDP spent by government.
Tax cuts of equivalent size would add 0.3 per cent to 0.6 per cent, it said.
The debate has divided politicians in leading economies, with Republicans in the US Congress saying tax cuts would be a more effective boost to the economy than infrastructure investment favoured by the Democrats.
“Tax cuts are an indirect form of stimulus, so you don’t know what the recipient of the tax cut will do with them,” said a senior IMF official. “The infrastructure investment would be a more direct form.” But the official said the fund was not giving blanket advice to its member economies, and the appropriate form of stimulus would vary between them.
The IMF made the assessment in a report on the global economy ahead of a meeting of senior officials from the Group of 20 large economies, planned for March 14th, which precedes a G20 heads of government meeting in London in April. The IMF noted further action was needed to address the crisis.
“Policy actions to resolve the financial crisis have been broad in scope, but have not yet achieved a decisive breakthrough,” it said.
“If the financial sector is not restored to health, an enduring recovery will not be possible.
Restoring the financial system will require not only central banks pumping more money into the system, but also dealing aggressively with bad bank-debt, and recapitalising healthy banks.
The fund said purging the banks of the bad debt by transferring toxic assets into a “bad bank” would be costly but such steps have been tried and tested in previous crises and worked.
It warned that credit conditions remain “seriously impaired” and that financial losses are mounting. “Action is needed on two fronts - to restore financial sectors to health and to bolster demand to sustain a durable recovery in global activity.” – (Additional reporting by Reuters)
