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The Global Stimulus Race

05 February 2021   |  

Among the new US administration’s top priorities is another round of stimulus. Though the bill looks different from the measures previously passed under a more divided government, it doesn’t go as far as the Democrat-controlled House went in its May 2020 $3 trillion proposal. Highlights include:

  • $1,400 stimulus checks—which would mark the biggest direct payments to individuals to date.
  • $400 in additional weekly unemployment benefits—the second stimulus package extended $300 in additional weekly payments through mid-March 2021. This measure would extend the $400 payments through September 2021.
  • $350 billion in state and local government funding—supporters have been vocal given the anticipated state and local budget shortfalls.
  • An increase in the federal minimum wage to $15/hour, along with additional time off for caregivers.

The current price tag stands at $1.9 trillion but could certainly come down in negotiations, particularly since Democrats have a razor-thin majority in the Senate and a slim one in the House. Not surprisingly, Republicans have signaled reluctance to spend so hard on the heels of the last aid package—indeed, as of this writing, they’ve offered a counter, more modest $618bn proposal. If passed, it would provide a third wave of pandemic-driven stimulus.

It’s worth noting the US has had one of the largest responses globally when it comes to fiscal accommodation: The US spent some 16% of 2020 GDP on stimulus efforts. For comparison, it spent just shy of 6% of GDP in 2009. Indeed, studies have indicated it spent 4% of GDP in recent dollars to win World War II. Needless to say, data show the US is outpacing the rest of the G-20.

But that’s not to say other countries haven’t taken extraordinary measures themselves. Here’s a sampling.

The EU’s Stimulus Hits
The EU’s member countries finally approved the $2.2 trillion stimulus bill in December, which was first agreed to in July—and marks the first time the region will raise funds via joint debt. The deal had been held up as Hungary and Poland originally vetoed the bill over concerns about language requiring fund recipients to maintain stipulated democratic standards.

Japan Goes Big
Japan’s response mirrors the US’s—it has committed 11.3% of 2020 GDP toward stimulus efforts. In December, newly minted PM Yoshihide Suga’s cabinet approved the country’s third supplementary budget in 2020, providing $708 billion in stimulus. Suga’s plan focuses heavily on travel despite resurging cases. It marks one of the first major moves of Suga’s tenure and adds to Japan’s already substantial debt burden.

China Goes Small
Most countries’ stimulus efforts have focused on the demand side; China’s has been much more supply side oriented, despite its recently stated intention to shift toward a more consumer-oriented economy. In May, it passed a 3.6 trillion yuan package, much of which is aimed at stimulating industry investment. Despite the risk it may exceed its longstanding 3% deficit ceiling, China chose to goose government spending instead of expanding credit.

Korea Has Held Off
Globally, Korea has had one of the lowest infection rates—so it hardly seems a coincidence it has spent among the least on stimulus (some 3.5% of 2020 GDP) among OECD nations.

Among the biggest elephants in the room (no pun intended) would arguably be where all this money comes from. To be sure, central banks globally have shown a willingness to accommodate necessary government spending. But at some point, do taxes need to rise? Not just in the US, but in some of these other big-spending countries, too, potentially. What happens if interest rates finally rise from rock-bottom lows and the increased debt burdens—on corporations and governments, developed and emerging countries alike—suddenly aren’t the “free lunch” they seemed in 2020? And what impact, if any, does this seemingly never-ending fiscal support have on credit markets? We may find out at some point. And we certainly may not love the answers. 

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