Coronavirus economic relief: are we getting value for the money thrown at the pandemic?

The US fiscal deficit rose from 6.4 per cent of GDP in 2019 to 17.5 per cent in 2020
This is an increase of 11.1 percentage points in GDP fiscal support to defend a decline of 5.8 percentage points in GDP growth

Andrew Sheng

Published: 4:00am, 13 Mar 2021

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The pandemic has left us a terrible mess to clear up. What policies will get us out of the huge debt we have incurred to pay for the health, wealth and job crises?

The devastation of 2020 was cushioned only by massive government spending. Aside from the favourite sport of blaming China for everything, each country will have to concentrate on getting its economy back on track.

The latest OECD Economic Outlook showed that world output was down 3.4 per cent last year, but is expected to see growth of 5.6 per cent in 2021 and 4 per cent in 2022. However, poorly performing countries will continue to suffer low growth rates.

China was the only major country that had positive growth in 2020 (2.3 per cent). The euro zone was down 6.8 per cent – with severe declines for France (-8.2 per cent) and Spain (-11 per cent) – and the United Kingdom down 9.9 per cent. Among emerging markets, India was down 7.4 per cent, Mexico 8.5 per cent, South Africa 7.2 per cent and Argentina 10.5 per cent.

US economic growth over the next two years hinges on significant fiscal stimulus and faster vaccination. But is this sustainable?

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The latest IMF Fiscal Monitor showed that fiscal deficits are projected at -13.3 per cent of GDP for advanced economies, -10.3 per cent for emerging markets and middle-income economies, and -5.7 per cent for low-income developing countries. US$14 trillion fiscal support was given in 2020, with global public debt rising to 98 per cent of GDP, compared with 84 per cent in 2019.

Almost every country threw money at the pandemic, with very little appreciation for whether we are getting value for money. In a panic, that is understandable. After the panic, the pain and reckoning must begin.

The US fiscal deficit rose from 6.4 per cent of GDP in 2019 to 17.5 per cent in 2020, an increase of 11.1 percentage points in GDP fiscal support to defend a decline of 5.8 percentage points in GDP growth (from 2.3 per cent to -3.5 per cent in 2020). In essence, the US deployed 2 per cent of GDP spending to defend 1 per cent of GDP growth.

The cost to the US is, according to IMF estimates, a rise in gross debt to 128.7 per cent of GDP, far higher than the world average of 97.8 per cent. In comparison, China’s gross fiscal debt was 65.2 per cent of GDP in 2020.

Hundreds of people line up outside a career centre hoping to find assistance with their unemployment claim in Frankfort, Kentucky, on June 18, 2020. Photo: Reuters

Is Biden’s US$1.9 trillion stimulus package this year too big for comfort? The non-partisan Committee on Responsible Fiscal Budget estimates that the total cost, including interest and extensions, would be US$4.1 trillion by 2031. In other words, all stimulus spending costs more than initially evident.

From a political point of view, Biden had no choice. If he does not revive the economy and protect his support base, he will lose the midterm elections in 2022, which would make him a lame duck in the second half of his term.

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So, from a global strategic perspective, the real issue is not further quarrels between the US and China. The key is whether Biden can turn around US long-term competitiveness damaged by four years of Trumpian fumbling on top of Congressional focus on short-term issues, rather than long-term infrastructure and structural weaknesses.

Take fiscal and monetary policy. Former US president Ronald Reagan famously said in 1981, “Government is not the solution to our problem, government is the problem”.

However, general US government expenditure rose by 78 per cent in constant 2010 dollars from 1981 to 2019, and total public debt increased from nearly US$1 trillion or 31 per cent of GDP when Reagan was president to US$26.5 trillion or 136 per cent of GDP by the end of September 2020.

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The Fed’s stated monetary policy goals are to promote maximum employment, stable prices and moderate long-term interest rates.

While inflation has been kept low at below 2 per cent per annum and unemployment remains low, long-term interest rates are at record low levels, while US inequality numbers have worsened since Reagan from a Gini coefficient of 0.38 in 1981 to 0.48 in 2019.

Meanwhile, the Fed’s balance sheet, which was US$865 billion or 6 per cent of GDP in August 2007, rose over eight times to US$7.6 trillion or 36 per cent of GDP by March 2021. That’s not long-term strategy, but fiscal and monetary overdose.

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Biden’s “build back better” programme will spend another US$2 trillion over the next four years on building green infrastructure and creating jobs. In comparison, the US spent US$686 billion in 2019 on defence alone; the cost of war since 2001 for America has been US$6.4 trillion and 801,000 deaths.

All this is funded by more government debt, which the Congressional Budget Office projects will amount to 202 per cent of GDP by 2051. Any emerging market with these debt numbers would be called a banana republic.

Federal Reserve chair Jerome Powell testifies before the Senate Banking Committee in Washington on December 1, 2020. The Fed’s stated monetary policy goals are to promote maximum employment, stable prices and moderate long-term interest rates. Photo: Reuters

The Biden administration is betting that the largest US stimulus package since World War II will restore American competitiveness and heal the nation. But much of this is not funded by domestic savings, such as taxing the rich, but by borrowing on the US dollar.

The rest of the world will not fund the dollar forever, certainly not at near-zero interest rates. And if interest rates rise, the fiscal costs would be substantially higher. So bet on the Fed doing more to keep rates low.

The truth of US debt is that it is not debt, but the rest of the world’s equity. America is the world’s too-big-to-fail borrower. If Biden fails, we will lose.

Andrew Sheng is a former central banker and financial regulator. The views expressed here are his own