With monetary policy being forced into ever more contorted positions to continue stimulating sluggish economies, particularly in the eurozone and Japan, the role of fiscal policy in boosting growth has become increasingly conspicuous by its non-appearance.
Those economies best placed to increase spending and cut taxes and large enough to make a difference are mainly sitting on their hands. The fiscal policy stance in the eurozone, for example, where Germany has plenty of room to spend, is only slightly positive; that in the US remains negative.
Yet this week there were a couple of glimmers of light. Shinzo Abe’s government in Japan signalled that it would postpone the sales tax increase scheduled for April 2017. And in Canada, Justin Trudeau’s administration unveiled a stimulus budget with infrastructure and other spending designed to raise gross domestic product 0.5 per cent this year and 1 per cent in 2017-2018.
These moves are not huge, and Japanese fiscal policy overall is in any case contractionary. Yet the decisions have symbolic impact because of the way that fiscal policy in the two countries has been used and abused in the past.
Mr Abe is keen to avoid a repeat of the fiasco of 1997, where a premature rise in the sales tax was shortly followed by a recession. The degree of causation can be disputed but that the increase was a mistake seems fairly certain. This time round, fiscal policy, one of the “three arrows” of Mr Abe’s economic strategy, has not by itself jump-started Japan out of its position of low growth and the threat of corrosive deflation. But the fact Mr Abe is keen to avoid a similar mistake to that made in 1997 is a good signal for his government’s willingness to continue to use all tools available.
Canada’s action, though small in global impact, marks a decisive break with the recent past and with the wrong-headed citation of previous Canadian experience in the current situation. Stephen Harper, Mr Trudeau’s predecessor, was one of the earliest and loudest advocates of ending fiscal stimulus soon after the global financial crisis. Misguidedly, Mr Harper used a G20 summit in Toronto in 2010 to corral other governments in support of austerity, a mis-step that helped to slow the pace of global recovery.
Moreover, as governments debated fiscal policy in the years following the crisis, supporters of austerity often cited Canada’s experience during the 1990s: spending cuts and tax rises brought a government deficit of nearly 6 per cent of GDP back to balance in five years while the economy grew healthily. But, as ministerial veterans of that episode have pointed out, the consolidation took place against a backdrop of a vibrant global economy, where domestic demand could relatively easily be replaced by exports. The same is emphatically not true of the current situation, where sluggish worldwide growth and weak world trade have made export-led expansion much harder.
Mr Abe is reportedly planning to announce the delay in the sales tax increase at a forthcoming meeting of the G7 economies that Japan is hosting in May. The G7 has often struggled to find anything meaningful to do in recent years. Effecting a collective change of stance on fiscal policy would be an excellent way to reassert its relevance.
Such a rapid collective conversion is unlikely. Yet examples of countries using what space they have for fiscal stimulus are welcome. Monetary policy cannot do everything. Mr Abe’s and Mr Trudeau’s governments have this week shown at least some understanding of the part they need to play.
