In response to the COVID-19 pandemic, governments have launched massive fiscal and monetary support programs. However, the direct stimulative impact of these tax measures is less than the overall figure of over $8 trillion suggests. Tax programs contain many components and, although they vary considerably from country to country, about half or less of them include increases in public spending or reductions in tax revenues, the rest granting business loans or guarantees. As it becomes clear that more fiscal support is needed, future measures should be designed with greater consideration of the balance between direct measures and guarantees, as well as current consumption and infrastructure investment. Upgrading infrastructure holds promise for improving the productivity of economies, crucial to help pay the huge increase in public debt.
Different magnitudes and components of fiscal measures
According to the International Monetary Fund (IMF), “above the line” fiscal measures amounted globally to $3.3 trillion, or 4.1% of gross domestic product (GDP; as of 8 April , before counting the US $545 billion third package and South Africa’s $26 billion plan). “Above the line” measures refer to increases in government spending and reductions in tax revenue, which have a direct impact on economic activity through fiscal multipliers. In addition, countries offered $4.5 trillion (5.6% of GDP) in “below the line” measures (loans and equity) as well as guarantees (to companies and banks); the economic impact of these measures depends on the extent to which they are taken. accumulated and spent by the targeted recipients.
More importantly, countries vary considerably in the magnitude and composition of their tax measures. At one end of the spectrum, Japan issued 10% of GDP in measures above the line, 10% of GDP in measures below the line, and 0.4% guarantees. The United States proposed 6.9% of GDP for measures above the lines, and around 2% of GDP each for items below the line and guarantees. In contrast, many European countries have done the opposite. Germany offers 4.4% of GDP in programs above the line, but 6.2% in programs below the line and 23.4% in guarantees. Similarly, Italy drops 1.2% in above-the-line metrics but 32.4% in guarantees. The UK falls somewhere in between: 6.9% above the line and 15.7% below the line.
Among Emerging Markets and Developing Countries (EMDC), South Africa stands out with its recent announcement of a 500 billion rand ($26 billion) fiscal package (10% of GDP), of which 170 billion rands (3% of GDP) going to new spending, while the rest is to revamp current budget priorities and loans and guarantees. China only announced measures above the line representing 2.5% of GDP. Other developing countries offered fairly modest direct fiscal measures ranging from 0.7% of GDP in India to 2.9% in Brazil, with virtually no loan or guarantee programs (with the exception of Brazil offering 4.2 % of GDP in these facilities).
Overall, the differences in the size and composition of the fiscal programs of the countries of the world imply uneven and staggered recoveries, which makes them longer.
As the severity of the economic contraction reveals itself, additional fiscal support will be needed. When designing the next wave of budget programs, it is important to learn from recent experiences to better balance their different elements to be more effective.
Reconciling direct measures and guarantees
The first consideration is to strike a balance between direct fiscal measures and loans and guarantees. As the contraction deepens, more emphasis should be placed on direct fiscal measures to help the economy; loans and guarantees are important to help businesses avoid funding crises, but if not administered carefully (which is difficult to do in times of crisis) they risk supporting “zombie” businesses which act as a drag on productivity growth. Going forward, priorities should be given to helping the most vulnerable members of society, such as low-wage and poorly educated workers. Workers in the informal sectors of the economy are particularly vulnerable – the International Labor Organization has estimated that around 2 billion workers (or 61% of the total workforce) engage in informal work, which is much more prevalent in developing countries, especially in Africa and South Asia. . The duration of these worker support programs must be calibrated to be proportional to that of the pandemic; otherwise, many citizens will become destitute if support dries up while the crisis is still raging.
Support programs are influenced by countries’ labor market policies and, given their crucial role in tackling the crisis, it is useful to draw lessons from a comparison between wage subsidy and stipend approaches. unemployment. At one end of the spectrum, European countries, exemplified by Germany, lean towards wage subsidies through short-time working (kurzarbeit) programs. Basically, the government subsidizes companies to maintain payroll at lower wages (usually 2/3 of the original) for shorter working hours. In contrast, the United States has placed more emphasis on bolstering unemployment benefits while trying out the Paycheck Protection Program (providing repayable loans to businesses to maintain payrolls for eight weeks). The different approaches manifest themselves in the differences in the increase in unemployment rates – from 5% in March to 5.8% in April in Germany, against a rapid increase from 4.4% to at least 16% in the United States according to the estimates.
The German model – including the worker protection elements – has been seen as favoring insiders at the expense of the unemployed, resulting in rigidity and lack of dynamism in the labor market. This can hamper job growth as employers tend to be reluctant to hire because it is difficult to fire. On the other hand, such a model can maintain more stability and moderate rising unemployment and its associated social and transitional costs – many workers are still employed (albeit on reduced time and wages) and ready to return to work. production when the recovery begins.
In contrast, the US model aims to cushion the impact of rising unemployment, allowing for a higher turnover rate in the labor market, making it more dynamic and open to changes in job opportunities. The flip side includes greater economic insecurity faced by workers who may or may not be able to find a new job (and likely at lower wages) after being unemployed. People temporarily laid off during the pandemic – who make up most of the newly unemployed – are currently expected to be quickly rehired when the economy recovers. However, that remains to be seen given the unprecedented and unknown ways in which the pandemic has hit the economy, including causing possible shifts in economic behaviors that could keep consumption subdued and the recovery weak.
Balancing current consumption and infrastructure investment
Second, there should be a balance between current consumption (almost exclusively and appropriately the case thus far) and investment in infrastructure, especially as social distancing measures begin to be relaxed allowing people to return to work. Infrastructure in areas needing improvement include health and emergency care facilities and supplies, closing digital gaps that will drive social and economic inequalities in the 21st century, and green economic development. In addition, it is also important to invest in education and training to prepare workers for the jobs of tomorrow.
In this context, it is interesting to follow the evolution of the next major budgetary packages in the United States and the European Union (EU) – which are currently going through the respective political processes. A possible fourth U.S. tax package of up to $1 trillion is the subject of intense debate in Congress, involving discussions about aid to states and local governments suffering from huge budget deficits. Although necessary, little has been said about infrastructure. On the other hand, the European Recovery Fund (about 1,000 billion euros) concerns only investments in infrastructure, even if there has not yet been an agreement on the sources of financing of the Fund (probably from the reinforced European Commission budget and the Commission’s capital market borrowings) or on the form of disbursement (probably a combination of loans and grants).
Investments in infrastructure should receive more attention in the next wave of tax measures. Such investments offer the promise of improving the productivity of various economies, generating the growth needed to help pay off the huge increase in public debt that has been crucial to combating the pandemic crisis, but which is not free. The problem of debt will have to be dealt with – a topic covered in a following article.
Hung Tran is a Nonresident Senior Fellow at the Atlantic Council and former Executive Director of the Institute of International Finance.