Size and Composition of Fiscal Packages

Since the onset of the crisis, large stimulus packages have been introduced by almost all advanced and emerging economies. There are, however, significant cross country variations in terms of size and composition, reflecting different national preferences and the room available to maneuver. Nevertheless, some regularities can also be identified (Table 1 [ PDF 37.5KB | 1 page ] and Figure 1 [ PDF 19.9KB | 1 page ]). The size of packages increases with the soundness of the initial fiscal position (i.e., fiscal space) and decreases with the degree of openness, reflecting the concern of the more open countries that much of their stimulus would benefit foreign rather than domestic producers. The validity of this concern is confirmed in Figure 2 [ PDF 19.9KB | 1 page ], which shows that the size of fiscal multipliers varies inversely with the degree of openness.

The inverse relationship between the size of fiscal multipliers and the degree of economic openness is particularly noticeable in Europe. One possible explanation is that the high degree of integration in Europe magnifies the spillover effect of fiscal stimulus, so that an expansionary stimulus in any one country benefits its neighbors significantly, while the absence of a fiscal policy coordination mechanism means that expansionary stimulus in one country is not guaranteed to be matched by expansionary stimulus elsewhere (given sufficient fiscal space). This points to a possible coordination failure and a smaller size of stimulus than would be otherwise possible or desirable in Europe.

The size of discretionary measures also varies inversely with the size of automatic stabilizers (Figure 3 [ PDF 16.5KB | 1 page ]). Again, this is particularly relevant in Europe and partly explains why non- European OECD countries, where the size of automatic stabilizers is less relevant, exhibit a larger size of stimulus packages. From this point of view, automatic stabilizers partly compensate for the lack of a more cogent fiscal coordination mechanism in Europe.

Fiscal packages also show significant variation in terms of composition and effective duration.

Table 2 [ PDF 39.4KB | 1 page ] and Figure 1 [ PDF 19.9KB | 1 page ] summarize the main features of fiscal packages in these respects. While it is difficult to isolate specific patterns, on average, in the OECD economies, the resources devoted to spending and revenue measures are roughly similar in terms of their share in the overall packages. On the expenditure side, most packages include infrastructure investment as well as measures for social safety nets. Several packages also include measures to support industries that have been particularly hit by the recession, including housing.¹ Only a few countries include measures to support small and medium enterprises. On the revenue side, tax relief measures cover both capital and personal income taxes.

One aspect of the measures that is difficult to pin down is the extent to which such measures can be classified as permanent or temporary. This issue is particularly relevant when assessing the long-term sustainability of fiscal packages. In an International Monetary Fund (IMF) study (2009) most tax measures were classified as permanent while most spending measures were classified as temporary. This distinction should be taken with caution given that some of the measures now classified as temporary could prove very difficult to terminate in the future, even if only for political reasons.

In most cases spending for investment is larger than transfers to households (Table 2). However, the amount of resources devoted to investment varies greatly, with non-European OECD countries showing larger amounts than European countries.

An assessment of impact is of the utmost importance in order to determine when, to what extent, and at what speed the fiscal stimulus should be withdrawn and policy efforts redirected toward fiscal consolidation. One indication of the need for the maintenance of fiscal stimulus can be obtained by looking at output gaps. Figure 4 [ PDF 17KB | 1 page ] shows the evolution of the output gap in the OECD area since 1970, with projections to 2010. The current output gap, and its development into 2010, shows unprecedented values of up to -5% and these are likely to persist for some time to come. Given this, a significant withdrawal of fiscal stimulus at this time seems premature.

However, it is not self-evident that in all national cases fiscal stimulus should persist as long as an output gap persists. The feasibility of fiscal stimulus also has to be checked against available fiscal space. An analysis carried out by Centro Europa Ricerche (CER 2009) for the Group of Seven countries plus Australia and Spain confirms that governments have considered both these factors. While CER found no statistically significant relationship between output gaps and the size of stimulus packages (both discretionary and related to automatic stabilizers), they did find a significant relationship once the ratio of debt to gross domestic product (GDP) was controlled for.

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