Coronavirus: Is it finally the time to unleash daring economic policy?

Sarayu Bacchu

The current public health crisis caused by COVID-19 is swiftly transforming into an economic crisis. Never before has the global economy experienced such a sudden stop in economic activity.  From historic surges in unemployment benefit claims to deep plunges in stock markets, there is no doubt that the economic impacts of this pandemic will be severe. In this time of crisis, how should fiscal policy respond to minimise the inevitable economic downturn?

Acknowledging the gravity of the economic damage ahead, policymakers around the world have rightly ramped up efforts to stop their economies from grinding to a halt. Responses must be balanced and take into account both the short and long term effects, a difficult task when the future impact of the virus remains uncertain.

In the short-run, the impacts will be substantial on both the demand and supply side. Negative supply shocks will arise from illness, workers self-isolating or government imposed lockdowns. On the demand side, social distancing and lockdowns mean spending on the retail sector, social and leisure activities is close to zero. Furthermore, as countries close down borders, demand for flights and travel has already plummeted, with the tourism industry being devastated.

The effects in the long run are still uncertain, and consumer spending is likely to not rise immediately after lockdown eases. Whilst some businesses will be able to bounce back, others will most likely never recover fully. Some of the worst hit will be the travel and tourism industries, especially cruises. Moreover, unless recent falls in the stock market bounce back, future incomes will reduce and thus future spending will reduce, most obviously when individuals reach retirement.

Whilst the key focus of economic policy response should be to ensure continual delivery of public services and to minimise long term effects, this is challenging to undertake, given that funds are scarce and long term effects are not fully known.

Policymakers are unable to rely on tactics used in previous recessions, as there are several factors distinguishing the current crisis - the main one being the inability of consumers to spend as governments impose shutdowns and lockdowns. Further, interest rates are already extremely low, and further reductions would do little to boost spending in a time of lockdown. Instead, fiscal policy measures must focus on supporting individuals who lose income, maintaining public services and supporting affected businesses to ensure long term impacts are kept to a minimum.

In his first budget, Rishi Sunak ended a decade of austerity and ushered in a big increase in public spending with a £12 billion emergency fiscal stimulus to counteract the shock of the COVID-19 outbreak. The NHS has also received £5bn as part of an emergency response fund, and it has been said it will receive as many “millions or billions” as it needs to tackle the virus. In heavily hit sectors, like hospitality and retail, business rates have been abolished for one year, hopefully meaning firms will be able to survive through this period. In recent weeks, another £60 billion has been added to public spending and £350 billion for an emergency support package to businesses. Charities have also been hit hard by this crisis, but the £750 million package announced on the 8^th of April offers a glimmer of hope.  

As expected, borrowing forecasts have increased significantly from 1.8% of GDP (thought in March 2019) to 2.4% now. Isabel Stockton, a research economist at the Institute for Fiscal Studies said, “A deficit of over £200bn in the coming financial year is well within the bounds of possibility”. 
This is a huge figure, but ultimately, without these measures, economic and public finance costs would be a lot greater. The main aim of the government is to keep as many businesses and jobs afloat as possible, allowing normalcy to return as soon as possible after the crisis has passed, thus minimising long term impacts.

However, some critics have pointed out that UK hospitality will only receive half their wages from the government’s scheme, due to service chargers (normally 12-15% of the bill) not being included. This measure would directly affect tens of thousands of workers. Furthermore, studies have also shown that this economic crisis may impact women and low wage earners the most, which could further exacerbate existing inequalities. 

Nevertheless, the UK has mobilised a huge financial response very quickly - hopefully it is enough to keep firms surviving in these turbulent times.

Elsewhere in Europe, similar government spending has been announced, such as Spain’s fiscal package totalling around €200 billion. Across the Atlantic, the United States has agreed a historic $2 trillion stimulus deal to fight the coronavirus fallout. This large fiscal boost to the US economy cheered investors and gave markets some recovery after bruising losses in previous days.

However, a poll for the FT revealed that nearly three-quarters of Americans have seen their family’s income reduced. Another sign of how widespread the pandemic’s economic impact has become is the fact that almost as many families making more than $100,000 a year reported a hit to their income than those making less than $50,000 a year. Of course, the value of the reductions maybe different, and the same monetary loss would have varying impacts across households with different incomes. Furthermore, the graph below highlights this crisis impacting middle and low-skilled jobs hardest, with the worrying fact that some jobs and sectors had not yet recovered from the 2008 financial crisis, before being subject to another economic crisis. 

Moreover, as the pandemic continues to wreak havoc in the world’s largest economy, with a record 6.6 million Americans filing for jobless aid last week, a continued coherent and swift government response is necessary, if the disruption is to be contained. 

This pandemic has rapidly resulted in an economic crisis for several major economies, resulting in the implementation of fiscal packages of unprecedented sizes. As the COVID-19 outbreak continues to ravage on its path of destruction, a broad and sustained program of bold fiscal policy is necessary, to ensure the inevitable economic fallout is one we are able to recover from.