Fiscal Stimulus Packages: Can They Rescue the Economy?

Leszek Balcerowicz and Andrzej Rzonca were invited to kick off the first CASE policy research seminar of the year on 13 January 2009.  The financial crisis made it once more to the headline, but this time it was the response that most governments might provide, largely encouraged by the ongoing debate on fiscal stimulus in the media and specialized press, which came under fire.

Building on an article published in the December 10th edition of the Financial Times, The fiscal cure may make the patient worse, and a more detailed analysis of this article released in CASE Network E-brief No.10/2008, A Non-Stimulating Stimulus?, the guest speakers argued that fiscal stimulus is not the adequate response to the crisis in a majority of countries.  Indeed, fiscal stimulus packages fail to address the real incentives of consumers to spend, and because governments are increasing their borrowings in order to try to boost their economy, taxpayers are likely to bear the brunt in the long-run. 

“Take the example of Sweden in the early 1990s” say the authors.  Discretionary fiscal stimulus turned out to be contractionary.  Discretionary stimulus was immense, but it only swelled the public debt to GDP ratio.  Fiscal multiplier effects proved not only low but also negative as people grew pessimistic about the future of the economy. 

Mr. Balcerowicz and Rzonca furthermore discussed the effects of fiscal stimulus in the short and long term.  “Fiscal stimulus may be wasteful” they claimed.  Huge amount of money is being made available without a proper backlog of projects in place.  This is a free way for political considerations to take over economic concerns.   

As many blame the current financial crisis on deficient risk management, its popular response might well suffer the same accusation when fiscal stimulus packages fail to deliver the positive expected effects.