Тузувчи : Файзуллаева Н

Government and Institutional Focus on GDP

GDP is used by governments and other institutions to guide them in both fiscal (for example Government’s budgets), and monetary (for example Central banks setting of interest rates) policy decisions.  These decisions are often then assessed against their impact on GDP growth[12].  Governments and other organizations have consistently acted to exit or avoid recessions by seeking GDP growth through spurring consumption.  Some examples are the following:

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  Ex-President George Bush Jnr said, “The bill [US 2008 Economic Stimulus Act] I'm signing today is large enough to have an impact, amounting to more than $152 billion this year, or about 1 percent of GDP”[13];
  
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  In 2009 the Australian government distributed bonus payments of up to A$900[14] equivalent to approximately A$7billion to protect a flagging economy from the worst effects of a recession and its citizens were urged to spend the bonus payment received[15].  The government said a jump in retail sales had shown that the handout policy was working[16]; 
  
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  Ever since it reported sharply slower economic growth in the third quarter of 2009 (9% vs. 10.4% for the first half) China's top officials have been signalling that an economic stimulus package would be implemented so as to boost domestic demand and that the tight monetary policy imposed earlier in the year would be eased[17];
  
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  The US Congressional Budget Office and the US Federal Reserve predicted that going over the fiscal cliff would cause a recession in 2013;
  
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  Ben Bernanke stated in November 2012 that, “As you know, the Federal Reserve took strong [monetary policy] easing measures during the financial crisis and recession”[18];
  
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  The International Monetary Fund (“IMF”) states:
  
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    In surplus countries such as China and Germany, reforms are needed to boost domestic demand [GDP][19];
    
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    Reforms are necessary for the social safety net in China to encourage consumption[20];
    
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    [IMF] Directors supported further easing of monetary policy to sustain [GDP] growth, including through unconventional measures if necessary. They underscored the importance of the recent announcements by the European Central Bank and the Federal Reserve[21];
    
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  Japan’s new prime minister, Shinzo Abe, unveiled a ¥10.3 trillion ($116 billion) stimulus package….which Mr Abe insisted would lift the country out of recession[22];
  
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  “….[Mark Carney the next governor of the Bank of England] has suggested that the level of nominal GDP….might be a better target than inflation alone”[23];
  
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  The Economist states, “Our suggestion is that the bank [Bank of England], backed by the chancellor, George Osborne, should make clear that it will not tighten [monetary] policy until nominal GDP, currently £1.5 trillion, gets to a level that is at least 10% higher than today….That will encourage investment and spending”[24];
  
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  Luxembourg Prime Minister Jean-Claude Juncker stated, “I’m in favor of consolidation, but the budgetary adjustment measures we take shouldn’t pose a risk to [GDP] growth,”[25];
  
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  The US Treasury Secretary [Jack Lew] has urged countries with the “capacity” to do more to boost economic growth through consumer demand[26]; and
  
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  The US Federal Reserve has been acting since the “Great Recession” to keep interest rates at record low levels to spur private consumption and investment.  Its explanation for its current monetary policy goes, “For example, a drop in interest rates, a lower exchange value of the dollar, and higher stock prices will stimulate various types of spend­ing.  Investment projects that businesses believed would be only margin­ally profitable will become more attractive with lower financing costs. Lower consumer loan rates will elicit greater demand for consumer goods, especially bigger-ticket items such as motor vehicles.  Lower mortgage rates will make housing more affordable and lead to more home purchases.  They will also encourage mortgage refinancing, which will reduce on­going housing costs and enable households to purchase other goods.  When refinancing, some homeowners may withdraw a portion of their home equity to pay for other things, such as a motor vehicle, other consumer goods, or a long-desired vacation trip.  Higher stock prices can also add to household wealth and to the ability to make purchases that had previously seemed beyond reach”[27].
  

In light of the above examples one could argue that governments’ view their main economic goal as exiting or avoiding a recession by promoting GDP growth mainly through consumption.