John Samuel Raja D: Which is more stimulating?

If an economy’s in trouble, which is better, to spend more in areas like infrastructure, or to give tax cuts? This, of course, has been the subject of much debate in the US, with as many people criticising President Barack Obama’s plans as those supporting them. For what it’s worth, the IMF estimates the ‘fiscal multipliers’, or the impact of various government measures on the economy. As it turns out, the IMF estimates that for all G-20 countries (of which India is one), infrastructure spending yields the best results, though it has the ‘longest implementation lags’; tax cuts are obviously faster but, the IMF says, the results will be modest especially if these are not targetted at “credit-constrained consumers”.

According to the IMF, the upper bound for the impact of infrastructure spending is 1.8 — that is, a rupee spent on infrastructure will lead to a Rs 1.8 impact on the economy. The upper bound for tax cuts is a third this, at 0.6 — the argument here being that, consumers who are facing uncertain job prospects, will not spend the money they save through the tax cuts. Other forms of government spending like social security, transfers to local governments and assistance to small enterprises, according to the IMF, are likely to be more beneficial than tax cuts. Though the IMF has no separate numbers for India, the results are something the government would do well to keep in mind as it works on its Interim Budget — though few governments make meaningful tax changes in interim budgets, some in government feel this is a good opportunity to stimulate the economy. So, the toss-up could well be between tax cuts and infrastructure and other spending.