In a financial recession, Nobel laureate economist Paul Krugman says, policymakers need to do two things: get credit flowing again and prop up spending in the recovery period.
In his authoritative book "The Return of Depression Economics and the Crisis of 2008", he writes, the standard response in a financial crisis is to put in more capital with the spirit that we will do whatever it takes to turn things around.
"If what has been done so far is not enough, do more and do something different, until credits start to flow and the real economy starts to recover."
Like Paul Krugman, many other global economists and think tanks have been pushing the idea for big spending since the pandemic broke out last year crippling the global economy.
Advanced economies across the globe have apparently taken note. They have stretched out beyond almost their capacity to help businesses and people out of history's worst crisis which requires extraordinary measures.
In contrast, Bangladesh seems to have chosen a "business as usual" mode, outlaying an expenditure plan for the next fiscal year – taking a contrasting path from the global trend of generous spending to add impetus to the pandemic-hit economy.
Policymakers of many advanced economies however forgot the orthodox economic measures for now and are not bothered about the inevitable budget deficit at the moment.
When should they hit the brakes? Paul Krugman says, "Once the recovery effort is well underway, it will be time to turn to a prophylactic system: reforming the system so that the crisis does not happen again."
How do countries plan to spend?
Before leaving office, former US president Donald Trump had placed a $4.8 trillion budget, with social security and healthcare spending covering 60% of the outlay.
The American Rescue Plan, enacted in March by the new President Joe Biden, pushed the budget deficit close to $2 trillion in seven months of the fiscal year as billions are spent in stimulus payments.
Last year the deficit was $3.13 trillion, the biggest since World War II.
Biden proposed a $6 trillion budget plan for 2022 which will add $1 trillion to annual federal deficit.
The spending plan, highest since World War II if passed, includes spending for infrastructure upgrades and an expanded social safety net.
China, the world's second biggest economy, looks confident about its control over the pandemic situation and sees 2021 as the year of special significance for China's drive for modernisation and high-quality development as it is the first year of the 14th Five-Year Plan.
The finance ministry, in a 48-page report, explains the philosophy and expenditure plans for the year. In 2020, China's deficit-to-GDP rose above 3.6% on the back of 1 trillion yuan (about $155 billion) of Covid-19 bonds and spending for employment support, basic living needs and protect market entities. This includes support for efforts to cut taxes and fees, reduce rents and interest on loans, and increase consumption and investment.
The social security fund will see an increase of 120%, with substantial increase in agricultural insurance premiums for major crops like rice and wheat.
Finance ministers of the EU's two biggest economies France and Germany underlined their joint determination to use the spending to transform Europe's economy and put its recovery pace at par with the US and China.
"We have lost too much time…Europe must remain in the race," French Finance Minister Bruno Le Maire said, while urging the European Commission to disburse money to member states from the $906 billion fund as early as July. Last year, France's economy shrank by 8.3% amid the virus crisis, the worst slump since World War II.
The finance ministers said the new spending would help the EU avoid mistakes made in the wake of the 2008-09 global financial crisis and recession, when countries focused excessively on cutting spending and closing deficits. Le Maire said "today the priority is clearly to invest massively, not to consolidate public finances. We have drawn lessons from the past."
In the UK, a huge economic shock combined with unprecedented fiscal interventions to tackle the pandemic resulted in a fiscal deficit of £303 billion or 14.5% of GDP, highest since 1946.
The British Chancellor of Exchequer Rishi Sunak expects an even bigger deficit and debt as the government will have to borrow significant amounts to finance tax deferrals and help businesses to survive.
The chancellor says the huge public borrowing is a reality for "many governments over many decades and it would be irresponsible to withdraw support too soon."
The chancellor promised to do "whatever it takes" to help the economy recover from damage as more than 7,00,000 people lost their jobs and the economy shrank by 10% – the largest fall in 300 years since 1709.
Total Covid support package is £352 billion, one of the largest in the UK.
India projects a fiscal deficit 6.8% of GDP in 2021-22 as it has planned substantial spending in healthcare. In the new budget, Indian Finance Minister Nirmala Sitharaman, hiked fiscal impulse by 34.46% and health allocation by 137% from last year. Rs35,000 crore has been kept aside for Covid-19 vaccine.
The budget demonstrates a strong message for reform as it announces the setting up of an asset reconstruction company to take over bad loans of banks and divest two public-sector banks and one state-owned general insurance company.
The finance ministry has finalised a budget proposal for the next fiscal year beginning from 1 July without any big plan to rescue the economy by pumping more money for encouraging consumption and creating jobs – as stressed by economists.
As a percentage of GDP, the 2021-22 proposed outlay would be less than the current fiscal year's original budget if inflation is taken into account.
Finance bureaucrats ignored economists' suggestion that the government should forget about fiscal deficit and borrow more from foreign sources to bankroll a bigger budget needed for a widened social safety net.
The proposed new budget would account for only 17.46% of the GDP, among the lowest in the region compared to 26.9% in India, 22% in Pakistan and 31% in Nepal.
Rich countries spend much higher; the budget expenditure of France, Belgium and the United States is around 60% of the GDP.
Poor implementation capacity remains a roadblock in spending even if higher allocations are made, local think tank Centre for Policy Dialogue points out. The government could spend only 42% of the annual budgetary allocation in the first 10 months, even lower than the previous year.
Higher spending needs come along with a drastic fall in revenue receipts—a worldwide phenomenon leading to a wider fiscal deficit.
Average overall fiscal deficits as a share of GDP in 2020 reached 11.7% for advanced economies, 9.8% for emerging market economies, and 5.5% for low-income developing countries.
Bangladesh's deficit is projected at 6.2% of GDP for the next fiscal year, slightly higher than the current fiscal's estimate.
Economists suggest Bangladesh need not think much about the budget deficit in an unusual time when higher public spending remains an only option for revival.