An Article from the Jamaica Observer
This explains why Jamaica is going nowhere fast by more government spending to stimulate the economy and “balance people’s lives”.
Where are the Keynesians now?
It is so inexplicable why there are advocates (especially among our academics and intellectuals) for more government control of our embryonic economy. Maybe they believe that just a ‘likkle’ more spending, or maybe the oxymoronic “Government efficiency” will do the trick.
Government spending has little impact on economy — Bank of Jamaica
Wednesday, March 06, 2013
A recent Bank of Jamaica (BOJ) study says that the economy gets only two more cents of growth for every additional dollar spent by the Government.
What’s more, the tiny economic impact, which could be reflective of a high debt to GDP ratio, is restricted to the quarter in which the programme is implemented.
The central bank measured the impact of Government spending on the economy through “fiscal multipliers” to determine if tighter fiscal spending under an International Monetary Fund (IMF) programme would slow down growth.
“The study found that the government spending multiplier is very small in the first quarter at 0.02 and approximately zero in a year,” said a summary of the report published last week. “This effectively means that an additional dollar in government spending will deliver two cents of additional output in the quarter in which it is implemented and no impact in a year.”
The results could be explained by the high level of central government debt, Jamaica being a small, import-dependent economy, as well as the crowding out effect of government spending on private investment.
“Any increase in government spending may act as a signal that fiscal tightening (taxes increases and a reduction in government spending) will be required in the near future,” the central bank economists wrote. “Thus, in anticipation of this, consumers and businesses may not spend or invest in the short to medium-term given the possibility that they will be required to compensate for these expenditures in the future.
“In addition, given the high level of debt, an increase in spending is more likely to be financed in the short term by loans.”
The Government, which cut capital expenditure to 2.8 per cent of GDP in the fiscal year to end March 31, down from 4.2 per cent the year before, plans to maintain capital spending at similar levels in the next fiscal year. Thereafter, it plans to increase spending gradually to 3.6 per cent of GDP within three years.
No projections have been provided for captial spending by public sector entities, even though the planned $11.4 billion to be extratcted from the National Housing Trust (NHT) annually over the next four years is expected to constrain any major expansion in housing projects.
Savings on interest payments and cuts to public sector wages (relative to GDP) is expected to result in an overall cut in central government expenditure by 2.3 per cent of GDP next fiscal year, and even lower amounts going forward to the 2015/2016 fiscal year, when it is expected that total expenditure will be 26.7 per cent of GDP, compared to 30 per cent this year.
On the other hand, GDP is expected to grow by zero to two per cent over the next three years.
“Empirical studies on the fiscal multiplier have offered no consensus on sign, size or even the persistence of fiscal multipliers,” said the BOJ’s study.
The effectiveness of fiscal policy in stimulating economic growth has been the subject of decades of theoretical and empirical research.
The recent global economic crisis and the concurrent contraction of the Jamaican economy have renewed the debate on whether the Government should increase expenditure to stimulate economic activity or consolidate fiscal spending in order to attain sustainable growth path.
“Those arguing for expansionary fiscal policy tend to do so from a Keynesian position which states that output is determined by aggregate demand, thus the multiplier effect of fiscal expansion would increase demand and ultimately output,” said the BOJ.
“Opponents of expansionary fiscal policy argue that for small, open and highly indebted countries like Jamaica, increases in government spending crowd out private investment and lead to unsustainable fiscal and debt dynamics.”