National Fiscal Policy Responses to the Great Recession

The Great Recession was a global economic downturn that lasted from 2007 to 2009. In response, governments around the world implemented various fiscal policies to stimulate their economies.

The United States, for example, passed the American Recovery and Reinvestment Act in 2009, which provided over $800 billion in stimulus funding for infrastructure projects, education, and healthcare.

This stimulus package was designed to create jobs, boost economic growth, and provide relief to those affected by the recession. The government also cut taxes to encourage spending and investment.

Canada, on the other hand, focused on maintaining fiscal balance and avoided large-scale stimulus spending.

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China took a bold step by approving a 4 trillion yuan stimulus package, equivalent to US$586 billion, to boost its economy. This significant investment in infrastructure and social welfare was a pledge comparable to the United States' stimulus package.

The stimulus package was welcomed by world leaders and analysts as a sign that China was helping to stabilize the world economy. China's export-driven economy was feeling the impact of the economic slowdown in the United States and Europe, prompting the government to cut interest rates three times in less than two months.

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South Korea's stimulus package was a whopping ₩14 trillion, equivalent to US$14.81 billion in 2017, released in November 2008. The package included 4.6 trillion won for regional infrastructure and 3 trillion won in tax breaks for factory investment.

Germany, with its low debt and high balance of trade, was able to pass a 50bn euro stimulus bill in 2009, focusing on taxes, child tax credits, and spending on transportation and education.

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China's response to the economic slowdown was a massive stimulus package worth 4 trillion yuan, equivalent to US$586 billion. This investment plan was approved by the State Council and aimed to boost key areas like housing, rural infrastructure, and transportation.

The stimulus package was a significant move, representing a pledge comparable to that of the United States, but from an economy only one-third the size.

China's export-driven economy was feeling the impact of the economic slowdown in the US and Europe, prompting the government to cut key interest rates three times in less than two months.

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World leaders and analysts welcomed the stimulus package, praising it as larger than expected and a sign that China was helping to stabilize the world economy.

News of the announcement sent markets up across the world, with World Bank President Robert Zoellick declaring that China was "well positioned given its current account surplus and budget position to have fiscal expansion."

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South Korea responded to the economic crisis with a massive stimulus package worth ₩14 trillion, which is equivalent to US$14.81 billion in 2017.

This package included 4.6 trillion won for regional infrastructure and 3 trillion won in tax breaks, mainly for factory investment.

In April 2009, South Korea introduced a "cash for clunkers" program, offering a tax break of ₩2.5 million to drivers who replaced a car nine years old or older with a new car.

The tax break was in effect from May to December 2009 and was estimated to boost Hyundai sales from 530,000 to 580,000 and Kia sales from 327,000 to 357,000.

South Korea's 2009 budget also included $13bn in employment stimulus, which included handouts, training, and infrastructure.

The total stimulus in South Korea for 2008-2009 amounts to about ₩69 trillion, which is equivalent to US$70.99 billion in 2017.

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The Rudd government implemented two major stimulus packages in response to the Great Recession.

The first stimulus package, worth A$10 billion, was introduced in October 2008. It included direct payments to pensioners, low and middle-income families, and first home buyers.

Pensioners received A$1400 (single) or A$2100 (couples), while low and middle-income families received A$1000 per child.

First home buyers benefited from the 'Home Buyers Boost', a A$1.5 billion initiative to support them.

A total of 56,000 new training places were created in 2008-09, and nation-building funds were accelerated.

The second stimulus package, worth A$42 billion, was introduced in February 2009. It included one-off payments to working Australians and families.

Working Australians received an average of A$900 each, while families with school-age children also received a payment.

The package also included a A$14.7 billion investment in the Building the Education Revolution program, which focused on building school infrastructure and maintenance.

Other key initiatives included increasing the national stock of public and community housing by 20,000, providing free insulation to 2.7 million homes, and offering solar hot water rebates.

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A total of A$2.7 billion was allocated for small and general business tax breaks, and A$890 million was spent on regional roads and infrastructure.

Here's a breakdown of the key components of both stimulus packages:

The Great Recession was a time of significant government intervention in the economy. Governments across the OECD countries increased their expenditures rapidly between 2007 and 2009.

In the United States, about three quarters of the increase in government expenditures was in government transfers, not government purchases. This shift in spending priorities highlights the importance of transfers in the fiscal response to the crisis.

The Economic Stimulus Act of 2008 was a $152 billion stimulus package that primarily consisted of $600 tax rebates to low and middle income Americans. This targeted approach was aimed at boosting aggregate demand.

The American Recovery and Reinvestment Act of 2009 was a $787 billion bill that covered a variety of expenditures, including rebates on taxes and business investment. The bill's appropriations were spread over several years, with $184.9 billion allocated for 2009 and $399.4 billion for 2010.

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The European Union responded to the crisis with a 200 billion euro plan, which was complemented by national plans worth 170bn to 200bn euro. The EU-wide plan of 30bn euro was funded by the European Commission.

The welfare state played a crucial role in cushioning individuals from the economic insecurity caused by the Great Recession. The financial crisis has intensified calls for governments to step in and provide support to those affected.

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The European Union's response to the Great Recession was a three-wave crisis management effort.

In the immediate aftermath of the Lehman Brothers collapse in 2008, governments implemented Keynesian policy solutions to stabilize the economy, including liquidity and credit-enhancing measures.

Automatic stabilisers were allowed to cushion the recession between 2008 and 2010, helping to mitigate the effects of the economic downturn.

A second wave of crisis management took root in December 2009, following the Greek debt crisis, and shifted the focus to public austerity measures.

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Tough austerity and reform packages were implemented in countries such as Greece, Ireland, Portugal, and Spain, including labour market deregulation and cuts to social transfers and services.

The UK's Cameron coalition government was an outlier in its approach, predicated on an ideological narrative about welfare dependency.

By 2011, the European Union had entered a third phase of crisis management, as the sovereign debt crisis threatened the viability of the euro.

The December 2011 agreement to establish a fiscal compact for the eurozone failed to impress markets and was seen as a stopgap compromise.

The eurozone predicament is particularly worrying, as national fiscal and EU monetary authorities have little room for proactive adjustment due to distressed public finances and low interest rates.

Governments have been caught between pressures for deficit reduction and disenchanted electorates unwilling to abide by austerity promises.

The welfare state was meant to shield individuals from economic insecurity, but its scope was challenged by globalization. The financial crisis exposed market failures and excesses, leading to calls for government intervention.

The financial crisis shook faith in markets, revealing they're not crisis-free. Governments were urged to step in and address the crisis.

The welfare state's purpose is to share collective risk and prevent individuals from suffering disproportionately from macroeconomic changes. This goal was questioned before the financial crisis, when the market economy's success was emphasized.

The crisis, however, intensified demands for governments to take action and support the welfare state.

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In the United States, the American Recovery and Reinvestment Act (ARRA) was signed into law in February 2009, providing a fiscal stimulus of $831 billion.

The stimulus package included tax cuts and government spending increases, with a focus on infrastructure development, education, and healthcare.

The ARRA's tax cuts lowered the payroll tax rate, expanded the earned income tax credit, and provided tax relief to small businesses and low-income households.

Government spending increased in areas such as transportation, energy, and education, with a significant portion allocated to state and local governments.

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The stimulus package was designed to create jobs and stimulate economic growth, with the government aiming to create or save 3.5 million jobs.

In Europe, the European Central Bank (ECB) implemented a comprehensive monetary policy response to the crisis, cutting interest rates to historic lows and launching a large-scale asset purchase program.

The ECB's quantitative easing program involved buying government bonds to inject liquidity into the financial system and stimulate economic growth.

The ECB also implemented a negative deposit rate to discourage banks from holding excess reserves and encourage lending.

These policy measures helped to stabilize the European financial system and stimulate economic growth, but the region's economic recovery was slower than in the United States.

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