This business essay is an attempt to outline the main fiscal policy and measures deployed by governments globally as a response to the COVID-19 pandemic and assess the legacy they will leave for Global Finances and Economic Growth by mentioning the precise predictions, presenting relevant statistical figures, acknowledging the rampant challenges and dissecting the impact of the measures taken.

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Business Essay on Fiscal Policy

If there are indeed glitches in the Universal matrix then we have been for sure the spectators of one such event; which is the unforeseen Great COVID Pandemic that inadvertently precedes an equally unforeseen Economic Crisis. Assured by the Forbes as a “Black Swan” event. It is also dubbed the Great Lockdown Crisis since the trigger of the COVID economic scare was the unavoidable global lockdown.

By the autumn of 2020 “the immediate liquidity phase of the crisis was giving way to the solvency phase, and banks were undoubtedly bearing the brunt of the wave of bad loans and insolvencies affecting weaker businesses” (Global Economic Outlook, 2020). The World Bank forecasts the deepest global recession in decades.

Over the longer horizon, the deep recessions triggered by the pandemic are expected to leave lasting scars on the economy due to the following factors : (a) lower investment (b) erosion of human capital (c) lost work and schooling (d) fragmentation of global trade and supply linkages.

The World Bank also acknowledged that several developing nations were going through economic challenges much before the crisis galore, hence their challenges are even more intensified. Thereby an effective fiscal policy that focuses primarily on crisis management has become indispensable.

Most of the downward economic activity measured in all sectors during the pandemic was due to supply restrictions ( economists at St Louis Fed). Supply chain crises eventually lead to demand-side crises due to unemployment & later self-imposed isolation. Hence the general global Fiscal Policy that was immediately implemented was “Macroeconomic”, termed as “demand-stabilizers” which included: easing access to short-term funds, and higher aggregate funding.

Advanced countries were proactive in proposing programs to firms as a part of their pandemic fiscal policy, ranging from cheap credit lines to direct support. Individuals also received direct transfers from governments as a part of their massive stimulus packages, and developing countries tended to focus more on this type of policy. It’s a fact universally acknowledged that a win-win situation in Economics is as rare as a hen’s teeth. Hence, this policy has its downside which is: that the fiscal cost of such policies is unprecedented. In the US alone, where all these policies were enacted, the aid bill sums up to 3 trillion USD, about 15% of the US GDP. The most substantial actions by the US government were contained in the Coronavirus Aid, Relief and Economic Security Act (CARES). These include large tax rebates, direct transfers to individuals, transfers to subnational governments, and loans to businesses. The US also pledged 50 billion USD to international aid (BSI Economics data).

The most dominant, obvious, and preliminary fiscal policy adopted by governments all across the world was to unleash hefty financial stimulus by the Central Banks and Governments, which amounted to at least $15 Trillion (The Economic Times).

Another general fiscal policy was the “Expansionary Fiscal Policy”(Luca Fornaro and Martin Wolf, Coronavirus and Macroeconomic Policy, 2020) derived from a new Keynesian Economic model, to escape the vicious “demand-supply loop”. It was adapted by both developing and developed nations. Here an increase in aggregate expenditure increases profits, which in turn increases investment and employment, which then further increases expenditure, and so on. That is through this policy the government is effectively moving on from one vicious demand-supply loop to an expectedly profitable one.

Looking into the best and worst fiscal responses strengthens our analysis and insight further. The main yardstick of difference in the fiscal response of rich and poor nations was centered around “Informality” that is, the untaxed, unmonitored portion of the economy, which usually constitutes a high percentage in economies of developing nations.

Regarding providing fiscal aid directed at individuals or businesses, richer countries did more than emerging and low-medium-income countries. A graph by (IMF May 2020) reflects the higher ability of richer countries to support their economies and citizens, relying on a well-developed welfare system and low informality. Most emerging and low-income countries enacted relief policies, which were not necessarily tax-related but were in the form of, in-kind purchases and payment of utility bills.

Another difference between rich and poor nations regards the type of policy instrument that was used to make the money get through to firms and individuals. In richer countries, such as the US & UK, a large portion of the relief came in the form of loans and guarantees. This means that the government strategically used the banking system as a means to help firms stay afloat, by proposing subsidized credit lines. Hence the rich nations benefited from the well-established networks and the fact that virtually the whole economy is connected to the banking system, at the same time emerging and low-medium-income countries once again had to deal with the vices of informality.

Although it was not economic planning prowess but the ability to deal with the virus effectively that translated into the best economic responses in the pandemic. Countries like Taiwan were even able to provide stipends for COVID-19 patients since it had avoided lockdown by implementing strict measures and extensive contact tracing.

India for example on the fiscal policy front adopted various strategies amidst the pandemic fuelled by the fact that its GDP faltered to an all-time low, it adopted the concept of “Glocalisation” (globalisation+localisation) wherein the focus was on inviting & opening the market for foreign manufacturing units whilst promoting MSMEs, local businesses & start-ups.

The implications of the legacy the Pandemic Fiscal Policies shall leave are however diverse, enormous doses of stimulus spending will pile up the debt of countries especially those still struggling from the 2008 crisis. Global debt shall rise to $87 Trillion (Institute of International Finances). The most glaring legacy however comes out to be “The Debt Crisis”. Slashing down the interest rates might or might not help countries sustain themselves despite debts, for instance, low interest rates helped Japan despite its debt being 200% higher than the GDP as it prints money to issue debt which the central bank then buys.  But at the same time, Italy has not benefited from 5 years of low debt at all. The fundamental question thus is “Who will pay for it?”

Once the pandemic subsides “disinflation” will emerge as a big concern leaving a legacy of falling prices of goods due to a deep slump in demand for goods once extremely essential in the Pandemic ( economists’ poll, Reuters ).

Looking at a relatively positive impact of the pandemic fiscal policies is: that it forced nations to think and immediately implement progressive measures such as stimulus for start-ups, opening global corridors for manufacturing units, promoting small businesses, and most importantly the idea of “Agglomeration Economics” wherein related businesses benefit by clustering together (ref; Game Theory, John F Nash) gained momentum.

Mainly the global pandemic fiscal policies were all focused on immediate crisis management through releasing stimulus, wherein richer nations were relatively less pressurised due to well-established banking networks and low informality. Developing nations now face the dual challenge of micromanaging both the crisis and combating previous slumps. Better combating response to COVID ensured much less stimulus spending. The arrival and distribution of vaccines will pressure the government even more financially in planning and implementing the logistics, it may however also bring an opportunity to earn through selling the vaccines to more developed nations as per demand. The legacy all of it leaves as discussed above shall cause a “debt crisis”, and “disinflation” but it could also coax the governments to plan extensively and innovatively usher in efficient changes that might alter the traditional national economic narrative.

Key References :

• Bartsch, E. et al. (2019), “Dealing with the next downturn: From unconventional monetary policy to unprecedented policy coordination”, SUERF Policy Notes .:. 105
• Bergamini, E. (2020), How COVID-19 is laying bare inequality
• Ray, Subramanian, and Vandewalle (2020). India’s Lockdown. CEPR Polisy Insight No 102
• Guerrieri, V., Lorenzoni, G., Straub, L., & Werning, I. (2020). Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages? (No. w26918). National Bureau of Economic Research.
• IMF (2020). Fiscal Monitor Database of Country Fiscal Measures in Response to the COVID-19 Pandemic, October 2020.