Briefing paper

Twice the size in a fraction of the time

Government responses to the global financial crisis and COVID-19
COVID-19 Fiscal policy Government expenditure Infectious diseases Disease management Economic forecasting United States of America Australia

Both the Australian and United States governments are spending about twice as much to soften the impact of the COVID-19 pandemic as they invested in fiscal packages following the global financial crisis.

The big increase in budget spending reflects both the immediate impact of government-forced business shutdowns, and also the limited scope for monetary policy to offset the contraction.

Budget spending is much more concentrated, with the large majority of the investment occurring over the next 12 months, whereas the focus on infrastructure following the 2008-9 crisis stretched the major outlays over four years in both countries.

Key points:

  • Governments in both Australia and the United States are spending twice as much to soften the impact of the COVID-19 pandemic as they spent in packages following the global financial crisis, with extraordinary budget assistance exceeding 10 per cent of GDP.
  • Monetary policy has much less scope to offset the contraction than in 2008-9 when central banks in both Australia and the United States were able to slash rates by at least 4 per cent. This time, the maximum rate cuts have been just 0.5 per cent in Australia and 1.5 per cent in the United States.
  • The two crises are very different: in 2008-9, financial markets were disrupted and business and consumer confidence was shattered whereas in 2020, there has been a government-ordered shutdown of consumer-focussed business. Stimulating demand would not make any difference now.
  • Despite differences in political systems, both Australia and the United States have focussed emergency packages on helping businesses to survive the loss of sales and assisting those who have lost their jobs. There has been none of the “shovel-ready” infrastructure programs that were used following the financial crisis.
  • The budget spending this time is concentrated over the next 12 months whereas following the financial crisis, spending stretched over four years. There may be pressure for further stimulus spending if the recovery in employment takes longer than expected.
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