‘Infrastructure more helpful than tax cuts’ By Alan Beattie in Washington
Infrastructure investment will have far more impact than tax cuts for governments trying to boost economic growth in the face of the global recession, according to the International Monetary Fund.
Releasing its most recent assessment of the global financial crisis, the IMF said that stimulus packages announced so far would probably add somewhere between 0.4-1.3 percentage points to economic growth this year across the world’s big economies.
With the IMF predicting global growth to slow to just half a percentage point in 2009, that suggested government spending boosts and tax cuts were the only thing keeping the global economy from an outright contraction.
The IMF, which has urged faster and bigger restructuring plans for the financial system, also broke a taboo by calling for limited and temporary nationalisation of troubled financial institutions when shareholder equity had been wiped out by collapsed asset prices.
Estimates of the so-called “fiscal multipliers” – the eventual effect on gross domestic product of a given tax cut or increase in government spending – showed that infrastructure investment would add between 0.5 per cent and 1.8 per cent to output per 1 per cent of GDP spent by government.
But tax cuts of equivalent size would add just 0.3-0.6 per cent, it said. The debate has divided the US Congress and politicians in other leading economies, with the Republicans in the US saying that tax cuts would be a more effective boost to the economy than the infrastructure investment favoured by the Democrats.
“Tax cuts are an indirect form of stimulus, so you don’t know what the recipient of the tax cut will do with them,” said a senior IMF official. “The infrastructure investment would be a more direct form.” But the official said that the fund was not giving blanket advice to its member economies, and that the appropriate form of stimulus would vary between countries.
The IMF made the assessment in a report on the global economy ahead of a meeting of senior officials from the Group of Twenty large economies in London in April.
The fund repeated its recent call for governments to be much more aggressive in restructuring troubled financial systems and said that temporary nationalisations might be justified in some cases.
The IMF suggested a range of options including creating a “bad bank” to take on distressed assets and ringfencing bad assets on banks’ balance sheets using government guarantees – two elements of a new financial rescue plan likely to be announced soon by the White House.