Financial markets are fixated on how the world's central banks will adjust monetary policy as they grapple with inflation. But it's fiscal tightening -- the withdrawal of pandemic spending -- that will likely have more impact on the global economy next year.
Public programs to support households and businesses have been the most powerful engine of recovery from the Covid slump -- and now governments are hitting the brakes. The money they'll pull out of their economies in 2022 amounts to some 2.5 percentage points of the world's gross domestic product, five times bigger than anything that happened during the turn to austerity after the 2008 crisis, according to UBS estimates.
The belt-tightening points to slower economic growth, though it could also help to cool the inflationary pressures bubbling up in some countries. It's happening at different speeds in different parts of the world, and for a variety of reasons.
In the US, emergency programs are ending but President Joe Biden's administration is pushing a longer-term spending plan. Europe's austerity debate from last decade is poised to flare up again, while UK's leaders claim a moral duty to start trimming budget deficits.
Japan's new premier plans more spending, but it won't match the size of the country's record pandemic stimulus. China has been cautious with its budget, a stance that could shift as the economy slows. In some emerging nations like Brazil, soaring inflation is driving a debate about spending limits.
There are reasons why the drag on global output might not be as big as headline numbers suggest. Budget plans for next year aren't set in stone, and governments can adjust them if the virus persists. And some of the past 18 months' stimulus got stashed away -- so it can be spent next year or afterward, cushioning the blow.
Following is a round up of where fiscal policy is headed in some of the world's key economies.
Budget policy swung from being a support for US growth to a drag on it in the second quarter of this year, according to the Brookings Institution's gauge of fiscal impact, and it's set to remain that way next year with an average quarterly impact of about 2.4% of GDP (though those calculations don't include upcoming legislation).
There have been some offsets to the withdrawal of pandemic programs like enhanced unemployment benefits. The Biden administration has extended child tax credits, providing a monthly payout worth about $300 per child -- a temporary policy that may get renewed as part of a social-spending bill worth $1.75 trillion over a decade, about 0.6% of GDP.
That legislation, already scaled down by about half, is still being hashed out by Democrats in Congress, so its final shape and fiscal impact aren't clear yet. The White House has penciled in tax measures worth $2 trillion over the same period to finance it.
A separate $550 billion infrastructure bill passed with bipartisan support and is due to be signed by Biden on Monday, though only a small amount of that total would likely get spent next year.
Negotiations over how to get back to fiscal normality have already revived tensions between a German-led "sound finance" camp and those more concerned with avoiding a repeat of last decade's austerity-driven slump.
That clash won't be resolved quickly, because the debt and deficit rules that were suspended during the pandemic will remain so throughout 2022.
In Germany, who gets the finance ministry job in ongoing coalition talks could be an indicator of budget policy -- and the favorite, Christian Lindner, has a reputation as a hawk. The country's combination of thrift and red tape has already left it with an investment backlog worth hundreds of billions of euros.
France, whose President Emmanuel Macron is leading the charge for pro-growth policies across Europe, recently boosted spending plans in its 2022 budget to protect households from higher energy prices. Finance Minister Bruno Le Maire acknowledges the challenge of debt reduction, but says there are higher priorities post-crisis -- like tackling inflation and inequality, and investing to bring industry and jobs back to France.
Chancellor of the Exchequer Rishi Sunak surprised investors by announcing a fiscal loosening in his Oct. 27 budget. The giveaway, equal to around 0.8% of GDP, was designed to help households struggling with rising energy prices and the withdrawal of pandemic supports like wage subsidies.
Still, that's far from offsetting the sharp tax hikes on individuals -- to pay for health-care -- and businesses announced earlier in the year. Sunak, who's said it would be "immoral" to rack up more debt, is on track to eliminate borrowing for day-to-day spending and put the national debt on a declining path by the middle of the decade, targets enshrined in his new self-imposed fiscal rules.
Japan's new Prime Minister Fumio Kishida's is poised to unveil another fiscal stimulus package, which could include cash handouts and a revival of subsidies for domestic travel. The scale isn't clear yet, but economists surveyed before the premier's election win were expecting something around 30 trillion yen, more than 5% of GDP.
How much of that headline figure is actually new money -- as opposed to funds already appropriated but not spent yet -- will be a key clue to how aggressive Kishida intends to be in using fiscal policy to support the economy.
China's government has been relatively restrained in deploying fiscal firepower, signaling early this year – when the economy was rebounding strongly -- that support would be gradually reined in.
It's targeting a deficit of around 3.2%, down from more than 3.6% in 2020, and recent data suggest it could be smaller -- perhaps not far off a balanced budget. That's partly driven by Beijing's push to cut wasteful spending and reduce local-government debt. With growth momentum slowing, though, some economists are now calling for a stronger fiscal impulse.
Spending this year is more weighted toward projects which "significantly improve the people's well-being," such as renovation of old housing, public services and pension increases.
Brazil, which had the most generous pandemic stimulus among emerging economies, pared back much of it this year. But now President Jair Bolsonaro wants to increase cash transfers to the poorest households into 2022, when he faces a tough battle for re-election, and that requires changes to a spending cap in place since 2016. That's caused a storm on financial markets, and helped drive interest rates up amid concerns that inflation -– already above 10% -- could get worse.
Mexico took the opposite approach in the pandemic, keeping a tight grip on spending. There were some signs of loosening in September's budget proposal for 2022, which foresees a deficit of 3.1% of GDP compared with 2.4% in the preliminary version in March. Still, President Andres Manuel Lopez Obrador says he won't negotiate his austerity drive or increase the debt burden.
Stimulus spending has kept up across much of emerging Asia as the region recovers from this year's brutal second wave of infections. India has signaled it won't pull back on pandemic stimulus, while Thailand and Malaysia have raised debt ceilings to accommodate more spending and Vietnam is considering a massive new support package. Indonesia, meanwhile, has pared back its budget and raised taxes as it aims to bring its deficit back under 3% of GDP by 2023.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.