Time for a fiscal push?
21 November 2016
In the latest edition of Global Outlook, James McCann, UK & Europe Economist, considers the increasing speculation that we could be on the verge of a shift in global fiscal policy. Standard Life Investments has repeatedly argued that as monetary policy becomes ever more stretched, the case for a sustained fiscal push looks even more compelling.
To that end, we have created a 'Fiscal Heat Map' to help us gauge the likelihood of a shift in fiscal policy in various economies, in particular towards increased infrastructure investment.
The 'Fiscal Heat Map' is a quantitative analysis of several countries based on the following:
- The ability of the government to borrow without endangering public finances
- The cost that the government can borrow at
- The burden of debt financing
- The need for infrastructure spending
- The quality of infrastructure as assessed by the World Economic Forum
- The economic justification for stimulus
Additionally, the heat map makes a qualitative assessment of the political will and ability to loosen policy in each country. Our findings suggest there is room for action in most countries despite deteriorating public finances since the financial crisis: but also shows that the political will may be lacking.
James McCann commented;
“While there may be room, need, and justification for fiscal stimulus, in only a selected few economies do we see the political will to loosen fiscal policy materially compared to current plans.”
“We consider a lack of political willingness to be the binding constraint to broad-based and large-scale public investment at present. If we were to see a shift in this willingness to engage in significant public investment across many countries, this would constitute an upside risk to our forecasts. It would also provide a prompt to reconsider the outlook for asset markets.”
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A large coordinated stimulus could help boost nominal growth, reduce government saving and create a better balance between monetary and fiscal policy. But where there is no political will, we struggle to see a way forward for such an approach.”