The nation’s economic outlook follows the same cycle every year: At the beginning of the year, the government gets everyone’s hopes up with bright predictions, but a few months later, as disappointing export figures and declining consumer confidence appear, it starts to make downward adjustments to growth predictions. By the end of the year, the figures are downright depressing, but that is okay; a new year is beginning and the government once again rolls out its optimistic forecasts to make everyone happy again.
This year has been no exception. The government last week announced that the economy contracted in the third quarter, shrinking 1.01 percent from the same period last year. This is bad news for the nation and even worse news for the ruling party in the run-up to the Jan. 16 presidential and legislative elections.
The government’s response to the slump was to rush out a stimulus package, promising more than NT$4 billion (US$122.2 million) in subsidies to boost consumer spending.
The package includes measures in four categories: energy and water conservation, digital life, promoting online shopping, and travel. They involve subsidizing the purchase of energy and water conservation products and mechanized gardening equipment, improving broadband facilities, upgrading 2G mobile phone users to 4G, online promotions and hotel reservations. The government is to spend the entire stimulus package on the subsidies in the period from Saturday through Feb. 29, in the hope of boosting GDP to the tune of NT$15.4 billion.
Many nations seeking to boost their economies implement either monetary or fiscal policies, such as increasing government spending on infrastructure projects to boost investments. Public investments can create a considerable multiplier effect, improve infrastructure and can lay the groundwork for improved competitiveness. Another option would be to increase consumer spending by subsidizing expenses or reducing taxes.
The government has set its sights on boosting consumer spending, although some suspect that the package would not do much good.
Why are they so pessimistic? Because the government tried a similar approach in 2009, when the world was still reeling from the 2008 financial crisis, raising NT$85.8 billion in government debt to distribute vouchers to every ID card holder. Unfortunately, the plan’s contribution to the economy was a third of what had been projected. The remaining 60 to 70 percent was claimed by the substitution effect: People mostly used the vouchers to pay for what they would have bought with cash. The outcome was that the government incurred additional debt of NT$85.8 billion to boost GDP by a mere NT$30 billion. Had this money been used on infrastructure projects instead, it would have created more than NT$100 billion in value, even with a multiplier ratio of only 1.3 to 1.5.
The government is planning to spend more than NT$4 billion to boost GDP by NT$15.4 billion. Even though the stimulus package comes in the form of partial subsidies to leverage consumer spending, once the substitution effect is taken into account, NT$15.4 billion sounds optimistic. Considering that GDP is NT$15.5 trillion, boosting it by a factor of 0.001 is a drop in the ocean.
Granted, the government is in a bit of a bind. The coffers are empty and so is the administration’s bag of tricks. It is feeling the pressure from the looming elections. Coming up with an effective stimulus package this late in the game is not easy.
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