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Citi Perspectives for the Public Sector - Vol 1, 2012

The benefits of government stimulus spending

Government expenditure can have a beneficial multiplier effect on the wider economy. Even though advanced countries are striving to manage their decreasing budgets and reduce their deficits, economic stimulus remains a key fiscal policy tool and banks have a critical role to play.

by Filippo Sabatini
Global Public Sector Head
Citi Transaction Services

Although prospects for the global economy seem to be stabilizing, world leaders are still searching for ways of easing the pain and stimulating growth. Earlier this year, the IMF's Managing Director, Christine Lagarde, recommended government spending as one of the IMF's key policy solutions to stimulate economies. She called on world leaders to "seize the moment" to push ahead with policies that will boost growth and strengthen the international financial system.

Government stimulus spending comes in many forms, such as boosting capital investment in infrastructure, creating more public sector jobs and increasing benefit payments. Additionally, stimulus spending can also include more subtle forms like giving grants, loans and other financial assistance to businesses in distressed industries, especially SMEs (small and medium-sized enterprises), and investing in sunrise industries, specifically those with a significant economic multiplier effect, such as broadband telecommunications and mobile banking. Moreover, governments can promote financial inclusion and microfinance for the low paid and unbanked as well as improve support for exporters through state-run export credit agencies (ECAs) in order to stimulate the economy.

Banks can help governments carry out their economic stimulus plans in a variety of ways. For example, solutions may include supplier finance, mobile payments, export agency finance (EAF) and microfinance. Supplier finance - also known as reverse factoring - provides the supplier with early payment on sales, less interest and fewer fees. This is a unique solution, as supplier finance is initiated by the buyer (government) and based on the buyer's credit rating, whereby the bank utilizes the higher credit rating of the buyer, not the lower credit rating of the supplier. More and more governments are latching on to this flexible and mutually beneficial form of finance.

Government spending to stimulate the economy is a tried-and-tested fiscal policy. But it can also be a political controversy, with the opinions of policymakers and the electorate often divided. While everyone agrees that state spending has beneficial effects for the economy that extend far beyond the direct recipients, views on "when, where, and how much" are frequently subject to fierce debate.

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