The world under COVID-19 is facing an ‘invisible enemy’ which has disrupted economies and society on an unpresented scale. Many countries have taken extraordinary fiscal policy measures, announcing a plethora of significant fiscal stimulus packages to smooth out consumers’ income and stimulate demand. Already significant global production has been lost, and the forecasts for growth are being continuously revised, downwards, as events further develop. It is argued that stimulating consumers’ demand will not be enough as the global supply chain is also disrupted. One of the policies which has been proposed (and implemented in many countries) therefore takes the form of a) income transfers directed to consumers who have been placed on furlough, and b) loans to businesses affected, as well as deferral of payment of their current VAT (and other tax) liabilities. Critically evaluate this policy.
James Troth
BEE3047: Public Economics 1 Candidate Number: 096580
1 Introduction
At the time of writing this essay, the total cases of COVID-19 have just surpassed 4 million with the total deaths reaching 300,000. However, many European countries in particular have begun to see light at the end of the tunnel, with new daily cases slowing down. (worldometers). The success in decreasing the new daily cases and the infection rate, known as R, down to levels where public health systems are now able to cope has resultantly shifted attention towards the economic crisis and how to effectively mitigate the impacts of this. The extent of the impacts of the coronavirus economics crisis, coined ‘The Great Lockdown’, have and will further be felt all over the globe. The Bank of England has said it expects U.K. gross domestic product to fall by 14% over 2020 as a whole. The manufacturing PMI for the Eurozone registered at 33.4 on IHS Markit’s survey, the lowest level ever seen within Europe. It’s a similar story in Asian nations with countries including South Korea and Taiwan also slumped to lows not seen since the financial crisis (IHS Markit). The response to all this chaos and abject data signaling catastrophe has very much been universal with huge stimulus packages being rolled out across the globe. Since the beginning of the pandemic, the BOE has cut rates twice from 0.75% to 0.1% and announced a £200 billion extension of new quantitative easing (CNBC, Smith, 2020). The ECB has too fired its so-called ‘bazooka’, with a plan to expand its asset purchases by €750m in an attempt to avert the pandemic downturn. Further to this, many countries have also implemented universal income transfers to benefit individuals at this current time. Businesses are also being shown support by national governments worldwide, whether it’s in the form of tax deferrals or loan provisions, with the aim of providing short-term liquidity as cash starts to ‘dry up’. This essay will evaluate these specific policies, their effectiveness, and potential successfulness during this on-going global pandemic.
2 Income Transfers
Universal income transfers have been included in numerous nations’ fiscal responses in combatting this pandemic. These are essentially cash payments made to households in an attempt to aid them in inevitable financial privation as unemployment rises and furlough schemes are expanded. Universal income transfers have been rolled out in either one-off or multiple payments worldwide, aiming to provide short term support to individuals. Countries, where income transfers have taken effect, include the United States, where most individuals earning less than $75,000 can expect a one-time cash payment of $1,200, costing the government a total of $300 billion (NPR, Snell, 2020). Other examples include Singapore, where I am currently situated, where 2 separate payments are being offered to every Singaporean adult as outlined in the 3 discrete Unity, Resilience, and Solidarity Budgets announced in the past 3 months. Individuals can receive up to as much as $1,200 SGD (£680) and even those earning in excess of $100k and/or own more than 1 property still receive a total payment of $600 SGD (gov.sg, 2020). All in all, there are 143 income transfer programs in 81 countries that have been expanded or adapted to suit the needs of the crisis (Devex, Jerving, 2020). Cash transfers have been upgraded, adapted, and implemented at a great pace. One reason for this is that these transfers act as good short-term tools to get support to those who need it quickly. Cash transfers are a commonly utilised implement proven to be effective in poverty reduction. It gives the poor means to access basic necessitates and the same logic applies to those fraught in desperation under the current economic
BEE3047: Public Economics 1 Candidate Number: 096580
shutdown. Granting transfers to those also enables autonomy over how funds are spent so individuals can expend in means they deem most necessary to themselves (WPR, Datta, 2020). While cash transfers are clearly deemed suitable by most, hence the high implementation rate, the degree to which such policies can be rolled out effectively varies greatly between countries. Some countries may not be able to distribute cash payments to large proportions of the population with as much ease as others; ultimately it depends on whether there are efficient existing social assistance schemes already in place that can be expanded on (Devex, Jerving, 2020). The adoption of cash payments has been slower in lower-income countries according to the World Bank as these policies become problematic due to financing issues and the inability to identify those most in need. Many of these countries have adopted policies such as utility fees waivers and food assistance as well while cash transfers are being rolled out slowly. While proven to be effective in alleviating poverty, there are key differences in our current scenario. We are dealing with a fast-spreading contagious virus, transmissible through close contact and droplets released by an infected individual into the air. This means that one significant consideration is the need for self-isolation and social distancing during this process. Firstly, the method in which cash is distributed needs to enable social interaction to be limited; provisions such as online banking and mobile money among other automated systems need to be in place so an administrator or middle-man is not required in the distribution (Expenditure Policies in Support of Firms and Households, 2020). This will help limit the spread of the virus. Secondly, the consequences of futile and time-consuming cash distribution will encourage those who are financially struggling to make changes to their lifestyle. One such change that has been observed, particularly in India, is mass migration, away from cities and returning into rural areas or villages, often where family are located for many. As financial hardship strikes, many are being forced out of urban areas where the costs of living are higher than they would be in rural towns. This mass movement provides a conducive arena for the virus to thrive, hence the importance of quick delivery of cash transfers cannot be understated (BBC, Pandey, 2020).
3 Business loans and Tax Deferrals
The difficulties for firms that have resulted from COVID-19 is that wide-scale quarantine and isolation measures have induced, for the most part, a complete and total economic shutdown. This has caused a major demand shock affecting business in all areas of industry. The main issue facing firms in times of crisis is often liquidity and both business loans and tax or payment deferrals help with cash crises in the short-term. Providing liquidity support is crucial to keep firms viable and enable recovery once the virus has subdued as it permits firms to keep functioning, albeit at a lower operational capacity. As the economy starts to recover, it will allow business to scale up production to pre-crisis levels again at a much fast rate. Another purpose of providing liquidity support is to encourage job retention. Keeping people in jobs and reducing the unemployment rate as much as possible will help reduce fiscal costs in the long-term. Less job-seeker benefits, social assistance, and wage subsidies down the line is one reason why governments aim to help cash struggling firms (Managing the Impact on Households: Assessing Universal Transfers (UT), 2020). Some of the biggest measures imposed by governments around the world include the UK and the US. In the UK, a coronavirus rescue package worth £330bn in loan guarantees is being offered, the single largest state intervention since World War 2 (BBC, Jack, 2020). In the US, a $2