Yesterday, the IMF released a Staff Position Note entitled “Fiscal Policy for the Crisis.” Among other key conclusions, the report calls for “calls for a collective approach to providing fiscal stimulus,” but advised that “policies across regions should be tailored to those actions that are likely to provide the largest multipliers. In the United States, that is likely to be investment, other spending on goods and services, and some targeted transfers. In Europe, with its relatively large automatic stabilizers, the additional fiscal impulse can probably be somewhat less than in the United States.”
Two of the report’s co-authors, Olivier Blanchard and Carlo Cottarelli, Economic Counselor and Director of the Fiscal Affairs Department of the IMF respectively, reiterated the importance of a “global fiscal stimulus” in order to preclude the “continued fallout from the financial crisis.” The adoption of fiscal stimulus packages by member countries was first addressed by Managing Director and Chairman of the IMF, Mr. Dominique Strauss-Kahn, during the G-20 Summit that was held in Washington last month and more recently in his speech addressing the future of the Fund, at an event hosted by Banco de Espana, in Madrid, Spain.
A tangible consequence of the financial crisis has been a sharp fall in private demand. Mr. Blanchard cited that the continued decrease in demand “could exceed anything seen since the Great Depression in the 1930s.” Although under normal circumstances the Fund traditionally would advocate that countries adopt policies to decrease their budget deficit and public debt, Mr. Blanchard acknowledged that, within the context of the present crisis, more radical measures were warranted. The IMF has advocated specifically for the adoption of fiscal stimulus measures that will equal two percent of the world’s GDP. In order to achieve this goal, countries will need to adopt and implement, in tandem, measures designed to recapitalize banks and isolate assets and monetary policies to increase demand. In addition, governments will need to make a renewed commitment to “follow whatever policies it takes to avoid a repeat of a Great Depression scenario,” in order to shore up investor and consumer confidence.
Mr. Cottarelli also noted that stimulus packages should be structured by governments to include reversible fiscal measures. “Given the complexity of this crisis, policymakers have to recognize that there is an unusual degree of uncertainty of the impact of specific policies. Thus, they should not put all their fiscal eggs in just one basket, and the right package probably includes a mix of different policies.” The Fund has cautioned countries that anticipate adopting tax cuts or transfers to be selective in its exemptions and to carefully craft tax incentive programs designed to facilitate consumer spending.
Mr. Blanchard commented that, although government assistance within the context of the crisis has served to provide liquidity to frozen markets, “generalized” industry-specific bail-outs, as in the case of the U.S. car industry, could potentially create “an uneven playing filed with respect to foreign companies, which could trigger retaliation and possibly trade wars.”