The G20 finance ministers and central bank governors met in Ankara, Turkey, on September 4–5, 2015. They discussed the role of fiscal policy in economic growth. They outlined two broad areas where fiscal policy can be beneficial:
Both of these goals form part of what a fiscal policy should be aimed at in general. However, they have assumed high importance in these times.
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The OECD (Organisation for Economic Cooperation and Development), along with the IMF (International Monetary Fund), released a report titled “Fiscal Policy and Growth: Why, What, and How?” ahead of the G20 meeting in September. In the report, they listed factors that are important for advanced and emerging economies. Reducing fiscal deficits, adjusting fiscal consolidation in order to protect growth, providing efficient public infrastructure, broadening the tax base, and redesigning social spending programs were some of the areas that were very important for both sets of economies.
The debt-to-GDP ratio measures a country’s debt to its economic output. The higher the ratio, the more difficult it is to pay back the national debt.
In these trying times, when business investment is falling and consumers aren’t willing to spend, state, local, and federal governments have to open their purse strings in order to either maintain or resuscitate the economic output. A lot of that spending may come from borrowed money—either from the public by issuing bonds or from external borrowing. This leads to a rise in the debt-to-GDP ratio.
Although fiscal consolidation is important in the long run, countries on both sides of the development spectrum need to pace it so that they don’t derail economic growth. A tighter-than-required fiscal policy will also nullify several benefits from a loose monetary policy.
Countries also need to be wary of the impact of fiscal policies on job creation. Creating employment opportunities would require financial support from the government in terms of either direct job creation or investments in projects. This would lead to job creation.
This is important because only households with more people working would be confident and willing enough to spend. For the US, it would mean good business for companies like Procter & Gamble (PG), Mondelez International (MDLZ), and Home Depot (HD). It would be good for ETFs like the Consumer Discretionary Select Sector SPDR Fund (XLY) and the Consumer Staples Select Sector SPDR Fund (XLP).
In the next part of this series, we’ll see what the G20 leaders discussed in regards to structural reforms.