Economist suggests that governments spend their way out of trouble

Economist suggests that governments spend their way out of trouble

INTERNATIONALLY acknowledged economist Nouriel Roubini on Friday joined other experts in urging Prime Minister Shinzo Abe to delay a planned hike in Japan's sales tax, despite the country's government debt burden now being the highest among economically advanced nations.

Mr Roubini, a former economic advisor to the US Treasury Department and to the White House, also suggested that the US, China, Japan, Canada and some European nations all have "space" to expand fiscal spending, and so avoid an over-reliance on monetary policy to bolster economic growth.

Analysts said that his comments, made during a visit to Tokyo, provide further comfort to Mr Abe, who is wrestling with the need to follow through on his previous pledge to raise the sales tax, amid fears that doing so as scheduled in April 2017 could push the world's third largest economy back into a recession.

Earlier this week, Nobel laureate and former World Bank chief economist Joseph Stiglitz had also advised Mr Abe that now was the "wrong time" to be thinking about hiking the sales tax from 8 to 10 per cent, and that further fiscal stimulus was more in keeping with what the country needed now.

The advice from the two leading economists comes at a time when confidence in the effectiveness of monetary easing by central banks as a way to spur economic growth is waning; the counsel also comes ahead of the May G7 leaders' summit in Japan, which is expected to highlight the need for more fiscal spending.

Chief Cabinet Secretary Yoshihide Suga on Friday denied a report in the Yomiuri Shimbun newspaper, which had reported that Mr Abe was considering delaying the sales tax increase for up to two years if the economy continued to stagnate.

But Mr Roubini, now a professor of economics at New York University's Stern School of Business, on Friday urged Mr Abe, in comments to the Foreign Correspondents Club of Japan in Tokyo, to go ahead and announce a delay in the tax hike to remove uncertainty over the issue.

He also defended the Bank of Japan's controversial decision in February to impose negative interest rates on deposits that commercial banks keep with the central bank, but said the timing of the move was "botched".

Mr Roubini, saying that Japan needed a combination of both monetary easing and fiscal stimulus, claimed that there was a "50-50" chance that the economy contracted in the first quarter of this year; coming after the contraction in the final quarter of 2015, this would put Japan back into technical recession.

The economist, referred to by some as "Dr Doom", on Friday painted an overall gloomy picture of the global economy, citing a litany of problems confronting economic policymakers in advanced and emerging economies alike.

He said that overall, there was "too much debt", both public and private, which will cause deleveraging. Also, demographic trends do not favour global growth; labour supply and capital investment are declining, and structural economic reforms are being delayed. Amid all this, wealth inequalities and geopolitical tensions are both mounting.

Mr Roubini suggested that the Chinese economy was likely to experience a "bumpy" landing - one that was "neither hard nor soft" - as growth there slows from between 6.5 to 7 per cent to nearer the country's potential growth rate of 5 per cent.

He also indicated that India's growth potential may have been exaggerated.

Meanwhile, there is danger that aggressive monetary easing (including the negative interest rate policy in Japan, the euro zone and elsewhere) could lead to further fund flows into the US, creating upward pressure on the dollar and problems for the US economy, he added.

btworld@sph.com.sg


This article was first published on March 19, 2016.
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