The EconomistJanuary 30th 2021 Finance & economics 59T
he budgetdeficits of the world’s gov-
ernments will add up to about 8.5% of
global gdpthis year, according to new pro-
jections by the imf. That amounts to well
over $7trn of additional red ink. Remark-
ably, it may not be enough.
Many economists of a Keynesian bent
are haunted by the aftermath of the global
financial crisis, when recovery was enfee-
bled by a premature turn to fiscal caution.
Back then, economists fretted about spikes
in interest rates and the corrosive effect of
overborrowing. Now they view low rates as
a fact of life and worry about the scarring
effect of underspending. “With interest
rates at historic lows, the smartest thing we
can do is act big,” said Janet Yellen, Ameri-
ca’s new treasury secretary.
The arithmetic of deficits and growth is
daunting. Suppose a country ran a deficit of
$1trn in 2020 and repeated the trick this
year. How much would this yawning fiscal
gap add to economic growth in 2021? The
answer is zero, all else equal. To contribute
to growth, the deficit cannot just be big. It
must be bigger than it was the year before.
Few governments will meet that hurdle.
Of the 21 economies featured in the imf’s
forecasts, only five will spill more red ink
this year than last (measured in their local
currencies, at constant prices). The rest
will endure some kind of fiscal tightening.
The euro area’s budget deficit will shrink by
2.5 percentage points; Japan’s, by 5.2
points. The tightening will be even greater
in Brazil.
Fiscal consolidation would be welcome
if it reflected the strength of the economic
revival. But although many countries will
grow quickly this year, their recoveries will
not be complete. One measure of this in-
completeness is the gap between the level
of output the imfnow envisages and what
it foresaw before covid-19. Japan’s gdpthis
year will be 3.4% below the fund’s pre-pan-
demic projections for 2021; the shortfall for
the euro area is 6.1%. Taken together, the
scale of tightening and the shortfall in gdp
reveal how exposed a country is to auster-
ity. The chart shows which countries have
the most need for fiscal support and the
most sharply diminishing amount of it.
Some economies may need to accept a
dose of austerity to quell inflation or pre-
serve external stability. Saudi Arabia will
have to slash its budget if oil prices remain
around $50; otherwise large fiscal deficits
may put pressure on the riyal’s peg to the
dollar. Other countries are hobbled by high
levels of foreign-currency debt. Here, fis-
cally lax governments might trigger a run
on the currency or lean on central banks to
loosen monetary policy, thereby depress-
ing the exchange rate. Either outcome can
raise the burden of dollar debt to unbear-
able levels. But most of the countries in the
chart have low inflation, floating curren-
cies and modest amounts of foreign debt.
In Brazil, for example, core inflation is be-
low 3% and foreign-currency public debt
amounts to only 6% of gdp.
The country most exposed to austerity
is Canada. Ahead of its budget the prime
minister, Justin Trudeau, has urged his fi-
nance minister to “use whatever fiscal fire-
power is needed in the short term”, but also
to “preserve Canada’s fiscal advantage”,
which presumably includes its coveted
aaacredit rating. Its southern neighbour
seems less ambivalent. Theimf reckons
that America’s deficit will shrink by 5.7 per-
centage points based on current legisla-
tion. But if Congress passes another $1.1trn
of stimulus, as assumed by Goldman
Sachs, the federal deficit will be about as
big this year as last, and gdpwill be just shy
of its pre-covid path. America has many fis-
cal advantages. Its new government seems
intent on using them. 7HONG KONG
Which countries are most at risk of
premature austerity?
Belt-tightening
Acting less big
BucklingupSources: IMF; Goldman Sachs*Includes$1.1trnofadditionalstimulus
†Projectedbudgetbalancein2020 minus balance in 2021
‡Projected GDP in 2021 minus pre-pandemic projection% of GDPUS (Goldman Sachs)*US (IMF)ChinaBritainIndiaJapanCanadaBrazilEuro areaSaudiArabia-20 -15 -10 -5 0Budgetdeficit,%ofGDP
2020 2021 forecastFiscal tightening† GDPshortfall‡
-12 -6-9 -3 0CanadaBrazilSaudi ArabiaUS (IMF)JapanBritainEuro areaIndiaChinaUS (Goldman Sachs)*A
merican taxpayers’dollars should be
spent on American goods made by
American workers and with American-
made parts. So says President Joe Biden,
newly installed in the White House. On
January 25th he signed an executive order
meant to pull more of the $600bn of annu-
al federal-procurement spending into
American hands. The order was protec-
tionist in spirit: more home-made compo-
nents means fewer foreign ones. But Amer-
ica’s international commitments also
mean that Mr Biden’s measures may not
have much effect.
America’s efforts to restrict access to
procurement go back nearly 100 years. In
1933 Herbert Hoover signed the Buy Ameri-
can Act (baa), which attempts to generate
American jobs by restricting how direct
federal purchases are made. It says that
agencies must prefer domestic bidders for
American-based contracts worth more
than $10,000, as long as at least 50% of
their products are home-made, and (for big
businesses) they are no more than 6%
more expensive than the cheapest foreign
alternative. More recently, President Do-
nald Trump signed as many as ten execu-
tive orders in his attempt to push out for-
eign suppliers. As a result from February
22nd, in order to qualify for preferred sta-
tus, iron and steel products will have to be
95% home-made. Other products will have
to be at least 55% home-made. And the
pricing advantage will go up to 20%.
Mr Biden could accept these new
thresholds or raise them even higher.HeWASHINGTON, DC
Joe Biden’s executive order may not
have its intended effectBuy AmericanBuilding block
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