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Facing severe recession in the 1990s, the United States government adopted an aggressive counter cyclical fiscal policy which began with the economic stimulus act of 2008 just a few date after the recession's designated starting date.which was later followed by the much larger American Recovery and Reinvestment Tax Act of 2009. The fiscal damage to the United States over the last seven years is can be calculated. It is precisely $3,889,136,064,463, according to the Bush administration's Office of Management and Budget, which totaled up the budgetary cost to date of all the tax cuts and spending increases enacted over the past seven years. Of that nearly $4 trillion total, the administration estimates that 46 percent is tax cuts, 31 percent is defense.
Germany’s fiscal response to the crisis was rather timid as compared with those of China and the US. This column uses business-cycle connectedness indices to show that Germany should follow in the footsteps of China and increase its domestic spending so that it will generate net positive connectedness to others. Germany was able to increase its exports thanks to the fact that countries like the US, China and Japan stimulated domestic spending significantly.
After the bankruptcy of Lehman Brothers in September 2008, leading governments around the world announced fiscal packages to provide stimulus to their respected economies. The Chinese government was one of the first. As early as November 2008, it announced a stimulus package that was planned to go into effect immediately in early 2009. The Chinese government also stood out in terms of the size of the package. Its stimulus package contained an additional fiscal spending of $586 billion over a two-year period (each year’s spending was equivalent to 6.9% of 2008 GDP). This spending package was larger than the combined stimulus packages of Japan and the EU, but smaller than the one announced by the US.
China was able to increase government spending very quickly because its fiscal and external balances were in good shape before the crisis. In 2007, its general government budget was in surplus of 1.1% of GDP and its current-account surplus was equal to 10.1% of its GDP. Even though, both decreased slightly in 2008, China’s fiscal and external balances provided ample room for fiscal-policy man oeuvre in response to the crisis.
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