Economics Bubble, Bubble, Toil, and Trouble: which fiscal mix will work against COVID-19?

World's headline fiscal deficit is expected to move up to 11% of GDP in 2020 (vs. current 3%). This would imply global public debt to rise to the highest level since WWII.

21 Apr 2020

Global central government debt – long run perspective

Source: UBS, IMF, Haver

The figure charts global central government debt from 1950 until present, and includes a forecast for 2021. The debt is represented as a percentage of GDP.

A very different approach to '08/'09. Will it work?

The fiscal stimulus that has been announced is historically large (>2x the global financial crisis), but in some sense not 'traditional' stimulus. We went through the details for 34 economies with a fine tooth comb and show how infrastructure spending and tax cuts are almost completely missing from the stimulus plans. Excluding China, the emerging markets (EM) and developed markets (DM) mix of stimulus is remarkably similar.

Up to a third of all private workers in job retention schemes

Instead, job retention schemes account for a quarter of all fiscal spending. We show how those schemes seem to be working in Europe: more people in Europe have been shifted to government funded short-term work schemes the last 4 weeks than have been laid off in the US. The job retention schemes are expensive but will be a key determinant of the speed of recovery. The US Payroll Protection Program could soon exceed the European schemes, but it is unclear how much of the jobless claim surge can be undone.

$4 trillion in loan loss guarantees

In addition to the budget stimulus, 22 countries have announced various forms of loan loss guarantees for state, or commercial, bank lending to vulnerable corporates. It remains to be seen whether these firm will be effective, and most of these schemes still require banks to incur part of the credit risk (Germany, Switzerland and Italy have programs with 100% guarantee for smaller firms but many other countries don't). These guarantees have a potentially larger risk of turning into losses than the financial sector guarantees in 2009.

Cash is king

Direct cash transfers account for 11% of all stimulus. We describe the schemes (there are about 16 in total with a median size of 0.6% GDP) and note that while they are quick to disburse they likely provide little long lasting stimulus.

Headline fiscal deficit up 8% GDP in 2020; debt up 15% GDP over two years

We project the global fiscal deficit to increase from 3.2% to 11.2%. The most stunning increase, however, is for the US where we are now projecting the fiscal deficit to reach 23.5% GDP (inclusive of a few things which are still in the pipeline) and public debt to increase by 35pp over two years. Other outliers are Australia, Japan, the UK and Italy. A lot of the stimulus is, however, of a one-off/temporary nature (cash transfers, tax deferrals, loans, job retention schemes) suggesting that the deficits are at least somewhat self-correcting.

The fiscal multiplier could be relatively high but speed is of the essence

Given the lack of major prior imbalances, support geared towards preserving the existing structure of the economy, and the emphasis on expenditure, we believe the multipliers on the fiscal stimulus could be relatively high. We estimate that without this fiscal stimulus global growth could have been nearly 5% weaker. Whether the multipliers pan out, however, depends critically on the liquidity support reaching households and firms quickly enough to avoid firm closures and labour shedding. Although most programs have started to disburse, the timeline generally is several months, not weeks. If containment of the unemployment spike fails we expect a further wave of stimulus.

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