IMF Says G-20 Fiscal Stimulus Will Reach 2% Target

By Timothy R. Homan and Michael Forsythe

April 27 (Bloomberg) -- The International Monetary Fund raised its estimate for how much fiscal stimulus governments are injecting in an effort to fight the worst global recession since World War II.

The Washington-based lender said yesterday that the Group of 20 industrial and developing countries had committed to spending increases and tax cuts totaling 2 percent of their gross domestic product this year and 1.5 percent next year. That marks an increase from last month’s estimates of 1.8 percent for 2009 and 1.3 percent for 2010.

The IMF last year set 2 percent as the level required to reverse the recession, only for a transatlantic split to emerge as the U.S. backed the push in the face of resistance from the euro area. IMF Managing Director Dominique Strauss-Kahn said on April 25 that the current budget plans “may be enough” as long as policy makers can cleanse banks’ balance sheets.

The new estimates come after countries including Japan, South Korea and Russia announced new rescue packages for their economies. The biggest effect from the measures may come toward the end of this year, an IMF official told reporters on condition of anonymity.

Country-by-Country

Of the G-20 nations, Australia, China, Japan, South Korea, Russia, Saudi Arabia and the U.S. will meet the 2 percent goal this year, the IMF said. Russia’s stimulus is the highest, totaling 4.1 percent of its GDP, according to the fund. The U.S. estimate was 2 percent and Japan’s 2.4 percent.

Of the rest of the Group of Seven countries, Italy has lined up stimulus of 0.2 percent and France 0.7 percent, the IMF said. Germany’s plans amount to 1.6 percent and the U.K.’s reach 1.4 percent. Canada’s contribution is 1.9 percent.

U.S. Treasury Secretary Timothy Geithner said after meeting colleagues from the G-7 in Washington on April 24 that “it is critical that we supply the necessary stimulus to domestic demand in each of our countries.”

While the G-7 pledged to “deliver the scale of sustained fiscal effort necessary to restore growth,” European officials have resisted meeting the 2 percent goal. They argue that they have already spent enough and moved sooner, that their so-called social safety nets are larger and that they don’t want to cause budget deficits to balloon.

Amounts Spent

The G-20 countries will spend $820 billion on stimulus measures in 2009, up from a March estimate of $780 billion, and will spend $660 billion in 2010, the fund estimated.

The fund said the budget deficit of the G-20 would average 6.6 percent of GDP this year, up from 2.3 percent last year, and 6.5 percent in 2010.

The U.K. gap would be the biggest at 10.9 percent next year, up from 9.8 percent in 2009, it said. Japan’s shortfall will rise to 9.6 percent from 9.4 percent this year and Germany and France will each have deficits above 6 percent in 2010, it said. The U.S. imbalance will fall to 8.8 percent next year from 9.1 percent, it said.

Strauss-Kahn said that governments should start to discuss “exit strategies” from the emergency spending once the crisis passes.

The fund’s estimate for financial-sector support also increased today to 32.1 percent of GDP, up more than 3 percentage points from the March estimate.

To contact the reporters on this story: Michael Forsythe in Washington at mforsythe@bloomberg.net; Timothy R. Homan in Washington at thoman1@bloomberg.net