In Asia, Fiscal Credibility Gains Sway Over Push for StimulusBy
Governments are watching spending as debt levels climb
Fiscal caution comes as central banks tipped to tighten policy
Governments across Asia are keeping a wary eye on fiscal deficits and surging debt, providing only a modest cushion as central banks slowly begin raising interest rates.
China and Japan, the world’s second and third-largest economies, are treading cautiously by attempting to control government spending rather than unleash new stimulus. It’s a similar story in India and Australia where governments there are focused on containing budget deficits. Those with room to spend include the Philippines and South Korea.
“Most economies are keen to keep their fiscal credibility,” said David Mann, global chief economist at Standard Chartered Plc in Singapore. “I don’t feel like there is any urgent need to be loosening up just for the sake of boosting growth.”
Here’s a primer on the outlook for fiscal policy in Asia:
The government has pledged to restore a budget surplus by 2021 as it tries to bring a close to more than a decade of deficits since the 2008 global financial crisis. It’s keeping a tight leash on spending while also supporting infrastructure investment that’s mainly being funded and conducted at the state level. The central bank has kept its benchmark interest rate anchored at a record low 1.5 percent for 15 straight meetings to aid heavily indebted households.
With general elections not due until 2019, Prime Minister Narendra Modi’s government is expected to maintain fiscal consolidation. The budget position has been complicated by the rollout of a nationwide consumption tax, which means the fiscal position won’t be clear until next year’s annual budget is unveiled in February. “While it is difficult to say what will be the government’s overall deficit position in fiscal 2018, it is unlikely that the government will increase market borrowing,” said Bloomberg Economics’ Abhishek Gupta. At the state level, the risk of loan waivers for farmers and higher wages for civil servants could see the combined fiscal deficit for the federal and the state governments widen to 6.5 percent of gross domestic product in the financial year to March 2018, according to UBS Group AG.
Fiscal policy is expected to support economic growth even as policy makers curb debt in parts of the financial system. But unlike past cycles, the spending will be targeted, and already the usual year-end spending binge isn’t materializing. Bloomberg Economics expects a fiscal deficit target of 3 percent of GDP to remain unchanged in 2018. That suggests a rise in the deficit in value, which would contribute 0.2 percentage points to growth at 6.3 percent. The government has leeway in how it hits that fiscal target and local government spending also plays an important role in boosting demand. For example, the International Monetary Fund estimates China’s augmented budget deficit, a broader measure that includes quasi-fiscal activities undertaken by local governments, will be 12.6 percent of GDP in 2018.
While Prime Minister Abe is shifting to pro-growth social spending over fiscal consolidation, public debt at 240 percent of GDP means that role will be limited. Government advisers have recommended limiting the growth in spending to 530 billion yen ($4.7 billion) for the fiscal year beginning in April. While Japan habitually crafts supplemental budgets later in the year, sometimes using them for stimulus, as in 2016, that is becoming less of an option. “Fiscal stimulus is limited and not likely to boost the economy further in 2018,” said Bloomberg Economics’ Yuki Masujima.
South Korea is set for the biggest increase in spending since 2009 when the economy was reeling from the global financial crisis. Lawmakers approved a 429 trillion won ($393 billion) budget for next year on Dec. 6, a 7 percent increase from the initial spending planned for 2017. Yet the increase in spending is smaller than revenue, which the government expects to grow by 8 percent. The IMF recommended a “significantly more expansionary” fiscal policy for South Korea, with the fund’s mission chief for the country, Tarhan Feyzioglu, saying conditions could be considered contractionary if the government spent less than the revenue it earns.
Several countries in the region, with the exception of the Philippines, apply rules that cap the budget deficit or government debt, limiting the potential for fiscal stimulus.
In Indonesia, the deficit ceiling is 3 percent of GDP, which the government is wary of breaching. Authorities have been focused instead on tax reforms and chasing tax evaders to help boost revenue and provide President Joko Widodo with the funding for his ambitious infrastructure spending plan.
Philippine President Rodrigo Duterte plans to boost spending to a record in 2018 to finance his ambitious $180 billion program that includes a subway in Manila and a 653-kilometer railway to the south. Lawmakers are set to pass tax laws to boost revenue and keep the deficit below the government’s target of 3 percent of GDP.
Fiscal policy in Thailand is set to remain stimulative next year. Public investment is forecast to rise 11.8 percent compared with 1.8 percent this year as the government accelerates spending on infrastructure projects, including high-speed rails and motorways.
— With assistance by Karl Lester M Yap, Chris Bourke, Kimberley Verschuur, Michael Heath, Anirban Nag, Connor Cislo, Jiyeun Lee, Suttinee Yuvejwattana, Pooi Koon Chong, and Karlis Salna