(Bloomberg) — For much of the past few years, central bankers have lamented how they were left on their own to prop up economic growth.
It appears the whining is paying off. Governments are starting to loosen their grip on public expenditures, providing a fiscal boost to complement the unprecedented monetary-policy measures.
The budget deal President Barack Obama signed into law this month paves the way for stepped-up spending on domestic programs and the military. Japanese Prime Minister Shinzo Abe has pledged to cut corporate taxes next year, and economists anticipate he will put together a supplementary budget package soon.
Europe looks set to increase outlays to cope with a surge in immigration and improve infrastructure. French President Francois Hollande said he will step up spending on security in the wake of the terrorist attacks in Paris.
While the economic impact probably will be limited, “every penny from the government counts” when growth is so slow, said Joachim Fels, global economic adviser for Pacific Investment Management Co. By supporting expansion, the shift also should help equities and other riskier assets “to continue to do reasonably well.”
China and Canada also are turning to fiscal policy to help promote growth. Economists expect Beijing will increase investment on public transport and other construction projects. Ottawa, under newly elected Prime Minister Justin Trudeau, is breaking from previous orthodoxy on balancing the budget.
The moves stand in contrast to the experience of the past four years, when governments reined in spending after ramping up budget deficits to combat the Great Recession. That led to complaints by then Federal Reserve Chairman Ben S. Bernanke about fiscal headwinds holding back the very growth the U.S. central bank was trying to promote.
Both Bernanke and European Central Bank President Mario Draghi have said recently — using the same phrase — that monetary policy shouldn’t be “the only game in town” to aid the economy.
Help is on the way. The budget agreement in the U.S. raises discretionary-spending caps on everything from food aid to military equipment by $50 billion in the current fiscal year, ending Sept. 30, and by $30 billion the year after.
The new budget, combined with increased outlays by state and local governments, will lift gross domestic product by 0.3 percentage point in 2016, according to Alec Phillips, an economist in Washington with Goldman Sachs Group Inc. The New York-based investment bank sees GDP expanding 2.3 percent in 2016, in line with this year’s rise.
Next year will be the first since 2010 that fiscal policy adds to growth, Phillips said. As recently as 2013, a budget squeeze clipped more than 2 percent off GDP after lawmakers capped federal spending and allowed a temporary payroll-tax cut to expire.
The shift comes as the Fed is poised to raise interest rates for the first time since 2006 after holding them near zero for seven years. “They’re handing a bit over to fiscal policy,” said Fels, whose Newport Beach, California-based firm manages $1.47 trillion.
That “bolsters the case for the Fed to hike in December,” Ernie Tedeschi, an economist in Washington for Evercore ISI, said in a report to clients.