Stimulus spending needed now

THE global economy took a sharp turn for the worse in October and data from all over the world points to further deterioration.

The US government has tried monetary policy by reducing the Federal fund’s interest rate, the rate it lends to banks, to as low as zero.

That has not helped credit expansion, and there is consensus in the US, and elsewhere, that fiscal policy – government spending – is needed.

The US government had approved a US$700bil bailout fund, called Troubled Assets Relief Program or TARP, but that is just to buy over toxic assets from banks – it does not involve spending to spur economic activity.

It’ll be up to the Obama administration to launch a stimulus package which, it was reported last week, could be around US$850bil over two years.

That would be US$425bil a year or 3% of the US$14 trillion economy.

In Malaysia, the Government announced last month a RM7bil stimulus package aimed at keeping the economy out of a recession. That package amounts to 1% of the country’s RM700bil economy.

A larger stimulus seems to be needed, if government finances allow. The Government has indicated it will expand the package if necessary and last week, Minister in the Prime Minister’s Department Tan Sri Amirsham A. Aziz said a “strategic package” would be introduced to complement the stimulus package.

Stimulus spending is needed now, but it is not known if the programme is being implemented. Towards transparency, it is useful for the Government to announce the projects of the stimulus package as and when they are tendered out. This will lend credibility to the programme.