According to International Monetary Fund Managing Director Christine Lagarde, there was consensus at the last meeting of the Group of 20 nations in July that more needs to be done to tackle inequality and the backlash against globalization. That means one thing: spending.
Loosening fiscal policy a little in the most advanced economies could pay for itself, according to Oxford Economics, a U.K.-based research house. Their simulations suggest that a boost worth 1 percent of gross domestic product in government investment over two years would raise the level of GDP in individual Group of Seven countries by between 0.6 percent and 1.4 percent by 2017.
And if that’s to be funded by more borrowing rather than tax hikes, there’s never been a more welcoming time in global bond markets, as central bank asset-purchase programs from Japan to the euro area keep yields low.
Go Canada
Take the example of Canada. The G-7 nation’s new Prime Minister Justin Trudeau has put the government back at the center of the nation’s economy with about C$120 billion ($92 billion) in cumulative budget deficits projected over six years and the biggest jump in spending since the 2009 recession.
In the U.S., where Summers has called for a “major increase” in infrastructure investment, both major presidential candidates -- Democrat Hillary Clinton and Republican Donald Trump -- have come out in favor of more outlays on infrastructure. Trump also has proposed a mammoth tax-cut plan that experts say would cost more than $10 trillion over 10 years, though some of his advisers have suggested he will scale that back. In addition, the billionaire developer has backed increased military spending.
“If his program were implemented in full, it would be quite a large fiscal expansion,” said Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York and a former Federal Reserve official.
To be sure, the lift to global growth from the world’s sundry fiscal packages is expected to be modest, and may be short-lived. “It will only raise global growth by about 0.2 percentage point in the year ahead -- that is not insignificant but it is also not a game changer,” Hooper said.
Then there’s Europe. While countries like Greece, Italy and other crisis-prone states strive to work down deficits and debt, even those with some fiscal room for maneuver -- read Germany -- are loath to use it.
The sovereign debt crisis from 2010 has left many states still vulnerable in the event of renewed recession. The euro area is trying to recover from too much spending, not return to it. That doesn’t help when growth is so weak.