Budget 2021 – An expansionary wave

The COVID-19 pandemic that has persisted through the year, has raised the need to protect people, stabilize demand and stimulate recovery. The provision of emergency support has brought additional expenditure obligations, including emergency healthcare services, stimulus packages, payroll supports and rise in unemployment benefits. While advanced economies had automatic stabilizers to cushion the effect of the slowdown on their economies, several emerging and developing economies had little firepower to implement sizeable stimulus packages due to the sharp decline in commodity exports, tourism and trade.

Thus far, we have seen the budget proposals from a few countries, emphasizing an expansionary fiscal policy stance as various governments seek to reflate lagging economies and return their economies to the path of recovery. Although many governments incurred unplanned expenditure in 2020, it is expected that a more proactive expansionary approach will emerge in 2021 as governments plan to close the output gap created by COVID-19. South Korea announced plans to raise its 2021 budget by 8.5% to $467bn, despite a conservative revenue growth outlook (+0.3%). Despite the phasing out of COVID-19 related expenditures in its 2021 budget, Norway will run a budget deficit $6.6bn higher than its 2019 budget.

In Indonesia, a record $185bn budget was approved for 2021 funded by a record budget deficit of 5.7% to the GDP, higher than the relaxed legal limit of 3%. In Nigeria, we have seen the proposed budget of $34.5bn (₦13.08trn), which is 21% larger than the 2020 revised appropriation of $28.5bn (₦10.8trn). With a projected revenue of $20.8bn (₦7.89trn), the country is set to record a deficit of over $13bn (₦5.2trn). This deficit amounts to 3.5% of GDP, which breaches the legal limit of 3% set by the Fiscal Responsibility Act.

Fiscal indicators reflect the expansionary posture of several economies in 2020 despite the challenging economic landscape. Overall balances show that various countries of the world would run a deficit in 2020. Although a slight improvement is expected in 2021, these indicators will remain in the deficit region. For instance, advanced economies are expected to record a contraction in net lending & borrowing balance from -3% in 2019 to -10.7% and -5.5% in 2020 and 2021, respectively. Lesser deficits are expected in advanced economies in 2021, due to the size of stimulus packages implemented in 2020.

Emerging market and middle-income economies are expected to expand their net lending and borrowing balance from -4.8% in 2019 to -9.1% and -7.4% in 2020 and 2021, respectively. Low-income developing countries are expected to experience the mildest deficit of -5.6% and -4.8% in 2020 and 2021, respectively. As noted by the International Monetary fund, public investment needs to be embarked upon to raise long term economic growth. However, unfavourable debt positions limit the capacity of low-income-developing economies to inject the needed investment. More than at any other time, projects with long term multiplier effects are needed to place economies on an inclusive and sustainable growth trajectory.

FIRST SEEN ON VETIVA ONLINE
https://vetivaonline.com/res/macro/blog/2021-budget-an-expansionary-wave.html