COVID-19 policy response options – Part 2
THE ECONOMIC impact of COVID-19 will be extensive. The UN predicts a US$2-trillion shortfall in global income, with a $220-billion hit to developing economies. Many countries will have deep recessions, and entire industries are being devastated, such as restaurants, hotels and airlines.
It could take years for confidence to return in the tourism sector, businesses will lose a large portion of their annual revenues, so banks could see a surge in loan defaults, government tax revenues will decline, and reserves will be utilised, which will reduce the level of funding available for public investment for some time.
However, much depends on the speed and decisiveness of the policy response. With the right policies, the worst can be averted, the recession will be relatively shallow and short-lived, and economies will recover.
Managing the pandemic is the top priority, but it is also essential to mitigate the economic harm; a prolonged recession would force many more people into the informal sector, and into activities that may leave them more exposed to infection, and thereby increase the risk of a second peak of infections later in the year.
It is important to target two separate groups, households and businesses. The goal of targeting households is to protect the most vulnerable people, especially those who do not have health insurance, and allow them to self-quarantine. The goal of targeting businesses is to reduce the risk of a longer-term economic contraction and, in particular, to avoid large-scale lay-offs, which would have the disastrous effect of leaving many more people in financial need and therefore potentially obliged to try to survive in less structured and more risky environments.
Some of the policy options are as follows:
INTRODUCE A BASIC INCOME
Some countries are considering making an unconditional cash payment to every adult citizen. This could be a one-off payment, with the option for one or two more, depending on how long the pandemic lasts. The sum could be set at a level sufficient to ensure basic survival, which would mean relatively little to the wealthy but survival for those in precarious financial conditions, and allows everyone, including the poorest members of society, to self-isolate when required.
Pumping the money into the economy would also help to maintain demand and avert collapse. The money could be treated as taxable income; people with no other source of income would fall below the tax threshold, so would receive the cash without deductions; but those still in employment would pay tax on their combined income, which means that part of the money would return to the government.
The arguments against this idea are that it would be pointless if the sums paid to individuals were too small, and unaffordable if the benefits were too generous, and that if the supply side of the economy is hit hard, there might actually be fewer goods and services to buy, so that cash handouts would have the effect of pushing up prices.
However, it would only be a temporary bridging measure, and could be set to automatically terminate at a given date or when the national level of infection had fallen to a pre-determined level.
GIVE FINANCIAL INCENTIVES TO EMPLOYERS TO RETAIN STAFF
One of the most efficient ways to protect jobs would be to offer direct subsidies for wages to those companies that would otherwise have to make some or all of their staff redundant. This option would help to protect both the existing workforce and the viability of the companies, although this could become extremely costly in those sectors that suffer a catastrophic and sustained loss of demand. However, it is important to prevent too many businesses from collapsing, as that would shrink the productive capacity of the economy.
The government of Denmark, for example, introduced a scheme to cover 75 per cent of the salaries of employees (who would otherwise have been fired) for three months, which has prevented panic.
However, this option will not benefit the unemployed, self-employed and those in the informal sector, and so could only form a part of the response to the crisis.
INTEREST RATE CUTS AND FISCAL STIMULATION
There are also a number of macroeconomic policy measures available to governments to deal with potential economic contraction. One is a temporary relaxation of monetary policy to make funding available to banks at a lower cost to on-lend to their clients, thereby reducing the cost of business borrowing.
European governments are considering a range of further options, including postponing tax collection, allowing households and businesses to delay mortgage and loan repayments, giving banks the regulatory leeway to allow customers to postpone debt interest payments, helping the self-employed with cash payments, and government underwriting for emergency loans to small and medium-sized enterprises (which makes banks willing to lend without the usual stringent conditions).
Jamaica has already developed a particularly comprehensive policy response, including a J$25-billion fiscal stimulus package, with temporary cash transfers to businesses in targeted sectors based on the number of workers they keep employed, temporary cash transfers to individuals where it can be verified that they lost their employment since March 10, a special soft loan fund to assist individuals and businesses that have been badly affected, and COVID-related grants to support the poor and vulnerable.
Any of the above measures would have immediate benefits, and all of them will have longer-term costs and consequences. Public debt will rise, banks will see their portfolio of bad debts grow, and some funding will go to people who don’t need it. These can be addressed later, after the crisis.
The immediate benefits, however, outweigh all of the above. Jobs will be retained, firms will remain in business, demand will not collapse, and cash will get into the hands of those who need it most. Most important, however, is that even those on precarious incomes will be able to afford to self-quarantine, which means that other government actions (such as exhortations, lockdowns and curfews) are much more likely to be successful.
It will be important to taper down the special arrangements for the pandemic as soon as it is clear that the worst is passed, but this does not mean termination. As the current pandemic is likely to peak and then be followed by a second, hopefully smaller surge, the Government’s commitments should be fast, efficient and flexible so that they can be stepped down and up again, as necessary.
In normal times, there would be legitimate concerns about the extent and cost of public support, or that cash payments could undermine the work ethic. It is important to note, therefore, that these are not normal times, that anyone can be infected by the COVID-19 virus, and that a failure to reach every member of society with appropriate interventions puts everyone in jeopardy.
This is one time when it becomes apparent that we really must care for each other, for ethical reasons, of course, but also because the population as a whole will not stay healthy if any part of the population is neglected.
Professor Anthony Clayton, CD, Institute for Sustainable Development, The University of the West Indies. Email feedback to firstname.lastname@example.org.