Jamaica recently proposed a fiscal stimulus programme of just over J$14 billion, to jump

start growth in Jamaica. the proposal is adopted in addition to planned expenditures

beginning the next financial year. How might the government finance the additional
spending required by the programme and what effect might the different financing
options have on the net effect of the stimulus on the economy.

Apart from its financing, what other economic (versus social) factors do you think might
influence the overall impact of the programme on the economy –including the size of the
multiplier effect
1. Some interesting features of the paper’s conclusion, “There are four broad conclusions
flowing from our analysis.
First, there is no such thing as a simple fiscal multiplier. The response of the economy to
temporary discretionary fiscal stimulus depends on a number of factors, including most
importantly the type of fiscal instrument used and the extent of monetary accommodation
of the higher inflation generated by the stimulus.
Second, temporary expansionary fiscal actions can be highly
effective, particularly when the fiscal instrument is spending or well-targeted transfers,
and when in addition monetary policy is accommodative.
Third, permanent stimulus, that is a permanent increase in deficits, is much more
problematic than temporary stimulus. It leads to a long-run contraction in output, but in
addition the perception that deficits will
become permanent also substantially reduces short-run fiscal multipliers.
Fourth, the G20 stimulus should have significant effects on global GDP in 2009 and
2010.”
So, it seems that the rest of the world has good reason to believe in the ‘tooth-fairy’ of
fiscal stimulus. In discriminating as to types of stimulus the verdict is also rather clear,
“A number of results are consistent across all models.
First, the multipliers from government investment and consumption expenditures, which
are roughly similar in size, are clearly larger than the multipliers from transfers, labor
income taxes, consumption taxes and corporate taxes.
Second, multipliers are small for general transfers, labor income taxes and corporate
taxes, and somewhat larger (but still small relative to government expenditures) for
consumption
taxes.
Third, only targeted transfers come close to having multipliers similar to those of
government expenditures……[Yet....]
…it is of interest to note that in none of the regions [of the world adopting fiscal
stimulus] do increases in government consumption play a predominant role.”
There is one asserted, but untested outcome in the article on government finances,
evident in the phrase above ” a permanent stimulus, that is a permanent increase in
deficits.” If, as the models consistently find, the effects of GDP of government
consumption and investment have mutipliers that stretch to 2 over more than one year
when interest rates are low (and have a cumulative 5-year impact of more than 5), then
the effects on government tax revenues would exceed the intial outlay by some
 considerable degree; ie investment and government consumption can lower the deficit,
not create a permanently higher one. There is too the unacknowledged benefit to
governemnt finances from a growth-related decrease in welfare spending.
The alternative approach, based on ‘Expansionary Fiscal Contracion’ is dismissed in the
IMF WP. An examination of how the EFC experiment has failed Ireland can be found
here
http://www.progressive-economy.ie/2010/03/economically-damaging-and-fiscally.html
The main argument against Ireland adopting a fiscal stimulus is openness. (The debt and
deficit arguments do not hold since Ireland’s debt level is below that of the peer group
studied and the deficit matched by some). Yet the opennes argument is tested (Fig.88)
and found to have no appreciable impact on the effectiveness of fiscal stimulus, perhaps,
unstated by the authors, because the propensity to import is offset by both a greater
propensity to export and the greater efficiency that openness brings.

No growth swell for 2011 - Shaw pours cold water on

PIOJ proposal
Wednesday, March 16, 2011

Finance minister Audley Shaw yesterday poured cold water on a proposal by the Planning Institute of Jamaica
(PIOJ) to jolt economic growth in the upcoming fiscal year, through a stimulus package that was projected would
result in up to 5.2 per cent growth.

Last week, the PIOJ, in its Growth Inducement Strategy paper published last week, proposed a slate of initiatives,
including front-loading $14 billion of government capital expenditure, pushing ICT sector growht and fast-tracking
certain financial legislation in 2011/2012, while asking the International Monetary Fund (IMF) for more "fiscal
space".
(From left) Finance minister Audley Shaw, Professor Alvin Wint pro-vice chancellor for Board of Undergraduate
Studies at University of the West Indies and Dr Gladstone Hutchinson director general at the Planning Institute of
Jamaica at the Institute’s Growth Strategy Symposium held downtown yesterday. (Photo: Joseph Wellington)
 (From left) Finance minister Audley Shaw, Professor Alvin Wint
pro-vice chancellor for Board of Undergraduate Studies at
University of the West Indies and Dr Gladstone Hutchinson
director general at the Planning Institute of Jamaica at the
Institute’s Growth Strategy Symposium held downtown yesterday.
(Photo: Joseph Wellington)

1/1

Yesterday, at the PIOJ's Growth Strategy Symposium held at the Jamaica Conference Centre, downtown Kingston,
Shaw rejected the five per cent growth target for 2011/2012 while calling the three per cent growth that he expects
"ambitious".

"You can't achieve the five per cent growth in year one. That is not going to be practical. So in the first year growth
target modest of two to three per cent growth. It is ambitious. But we believe that ...with proper focus we can get a
minimum of two per cent growth in the upcoming fiscal year. And going forward it is a process of achieving higher
levels growth," remarked Shaw.

Shaw did not make clear how many of the recommendations would be implemented, if any.
The report, on the other hand, says that implementation of the specified short-term growth projects could nearly
double real GDP growth for 2011 and would result in 3.7 per cent on the lower range.

"This implies that, instead of a projected 2.1 per cent real GDP growth in 2011, these projects could induce
increased real growth to between 3.7 per cent and 5.2 per cent. This boost in growth would come from a total
expenditure of $14.4 billion, amounting to about one per cent of current GDP," stated the report.

Jamaica is projected to end this fiscal year with negative growth of 0.5 per cent.

The Growth Induction Strategy requires capital expenditure of $14.4 billion this year: $8.9 billion of which would
be invested in highways funded by the Ministry of Transport and Works (MTW); $3.8 billion spent on upgrading
agricultural farm roads also funded by MTW; $1.2 billion invested in community renewal funded by the
Development Bank of Jamaica (DBJ) and PetroCaribe; and $250 million offered as micro loans funded by the DBJ.

Importantly, the spending indentified $3.3 billion worth of road projects that were "targeted for implementation in
2011/12, but for which the fiscal space was uncertain" and $5.7 billion worth of projects under the National Works
Agency (NWA) that "were initially targeted for implementation after 2011/12" but could be brought forward to
2011/2012, including a $4 billion project to improve connectivity between the southern and northern coasts -- the
OPEC Phase 2 May Pen - Trout Hall road that was to start April 2012.

The 174-page Growth Induction Strategy report also recommends a modification of the existing IMF US1.2 billion
standby arrangement.

"Modification of the current IMF-Standby Agreement, so as to facilitate a longer period of transition to achieve
budget balance, will give the country the fiscal space to implement most of the above projects, and thereby facilitate
economic growth which is a crucial requirement for sustainability of the Fiscal Consolidation Programme," stated
the report. However, Shaw did not address this topic.

At the same time, PIOJ consultant professor Donald Harris agreed with Shaw that higher growth was unlikely in the
first year while qualifying the PIOJ's findings by saying the five per cent growth was possible if "you get the
maximum bang for buck".

"You could get lower growth in the lines of what the minister has suggested. This is why we should be thinking
forcefully (on the Strategy). The point is to begin to enact the kinds of policy in order to begin the process of
recovery. To establish a base built on competitiveness and access to financing which would spur production. All
those things need to begin now in order to build the foundation in order to jump start the economy initially. We
predict with that $14 billion it could boost the growth rate from 1.5 to about 3.0 percentage points in the upper part,
which would result in about five per cent if you get the maximum bang for buck. But you won't get it in the first
year," he said.

Jamaica's growth has lagged the region and the world for over three decades. It is projected by the IMF to grow at
one of the slowest in the world up to 2015. Shaw reasoned that the low growth was due to high debt and the collapse
of the financial sector in the 90s. Harris stated that the island's greatest constraints to business activity was crime,
corruption, taxation, electricity and financing respectively. Additionally he said that the nation's global
competitiveness was hurt by poor its macro environment, market size, innovation and institutions.

Read more: http://www.jamaicaobserver.com/business/No-growth-swell-for-2011_8529672#ixzz1IgMfVaO5

Britain cannot afford any further fiscal

stimulus, King warns
Mervyn King urges the government not to introduce more fiscal aid in next month's budget as
Britain's public finances are already in such dire straits
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• Comments (84)
• Kathryn Hopkins
• guardian.co.uk, Tuesday 24 March 2009 15.33 GMT
• Article history
The government should not unveil any further fiscal stimulus in April's budget as Britain's public
finances are already in such dire straits, Mervyn King warned today.
Appearing before the Treasury select committee, the Bank of England governor said: "Given
how big those deficits are, I think it would be sensible to be cautious about going further in using
discretionary measures to expand the size of those deficits."
"There is no doubt that we are facing very large fiscal deficits over the next two to three years,"
he added.
The chancellor of the exchequer, Alistair Darling, introduced a £20bn stimulus package in
November, but King said the government should be careful about further plans as the country's
public coffers are under even greater pressure from falling tax revenues and higher benefit
payouts. Darling will unveil his next budget on 22 April.
The governor's caution over a second round of fiscal stimulus measures followed a call from
former cabinet minister, Stephen Byers, for the chancellor to abandon the centrepiece of his
November package - the temporary cut in VAT to 15%. He said it had "run its course both in
terms of its overall benefit to the economy and in relation to the political return that comes to the
government".
The Office for National Statistics last week reported a £9bn deficit in February, bringing total
public-sector net borrowing for the first 11 months of the fiscal year to a record £75bn - more
than £50bn higher than for the same period last year.
King also revealed that the Bank's purchases of gilts in its quantitative easing (QE) programme
may end up being less than the planned £75bn pounds if the programme works.
Graham Turner at GFC Economics said: "If a central bank is going to do QE, it is pretty
pointless flip-flopping on the amount of bonds that may be bought, particularly straight after the
release of a higher than expected inflation report. It sows significant doubts in the minds of gilt
investors: the BoE is not really committed to QE, because it genuinely fears a return of inflation.
The policy is unlikely, therefore, to succeed, which is unfortunate, because so far the evidence of
QE pushing corporate borrowing costs down is limited anyway."
Meanwhile, tension is expected to mount between the prime minister, Gordon Brown, and
European commission president, Jose Manuel Barroso, over further fiscal stimuli when they
meet this afternoon at the London summit on the financial crisis. Brown said Europe may not
have done enough, despite injecting nearly £370bn into EU economies, and that the G20 meeting
may have to make further decisions on spending, but Barroso is trying to rein in the prime
minister's ambitions.
Shadow chancellor, George Osborne, said: "Today, not only has a former Labour cabinet
minister attacked the ineffective VAT cut, but the governor of the Bank of England no less has
said Britain cannot afford a further fiscal stimulus. He goes on to say that monetary policy
should be the main tool to tackle the recession.
"This is hugely significant, as it completely vindicates the big decision taken by David Cameron
and myself on the economy, and it leaves Gordon Brown's political plans for the G20 and the
budget in tatters. It is the prime minister who is now isolated at home and abroad."