Fiscal policies to cure the coronavirus-hit economies

Covid-19 cases around the world have been rising rapidly, with the total number of infected patients surpassing 500,000. As the outbreak becomes increasingly widespread, more economies are being hit with weak external demand and stricter internal measures to promote social distancing. Over the past few weeks, central banks worldwide have been ramping up their efforts to keep their economies from collapsing. Nonetheless, limited monetary space and increasing public fear in most countries are hindering the effectiveness of those policies. Therefore, the attention now turns to fiscal policies. In fact, many countries at present are stepping up their sovereign spending as the outbreak situation worsens, a similar trend to the one the world witnessed over the past weeks with the easing spree by central banks.

Some of the most recent developments include the US cabinet approving the coronavirus bill of $2 trillion (about 10% of the country’s GDP) on March 25. The decision came after the intensification of the outbreak in the country and the record surge in jobless claims. The measures cover a one-time cash payment of $1,200, loans and grants for small businesses, four-month unemployment insurance payments that will cover 100% of lost wages, and various tax payment delays and breaks. The package also involves increased funding for the healthcare system and state and local governments.

Singapore, on March 26, added S$48 billion to its S$6.5-billion outbreak-related stimulus package announced in February. The total amount makes up about 11% of the country’s GDP. The recent measures focus mainly on stepping up the existing policies to mitigate the outbreak’s fallout on businesses and workforce. These include property tax reductions for hotels, vendors and restaurants, as well as an extension of wage support for workers in the most affected industries and cash payouts to low-income labour.

Similarly, on the same day, the United Kingdom announced an additional £9 billion worth of fiscal spending to support self-employed workers. The amount came after the unveiled £30 billion and £350 billion worth of stimulus announced on March 11 and 17, accordingly. The total package, now accounting for almost 18% of the country’s GDP, consists of various measures such as guaranteed loans, a three-month mortgage holiday, tax cuts and exemptions, income support, and three-month wage subsidies of 80% up to £2,500 for self-employed workers.

With the Bank of Thailand slashing its 2020 GDP growth forecast to -5.3% from 2.8%, the Thai economy is expected to hit a 20-year low after the 7.6% contraction during the 1998 Asian financial crisis. The Covid-19 outbreak dampens both global demand for exports and tourist revenue for the small and open economy. On March 24, the government approved the Phase 2 fiscal stimulus package worth 117 billion baht, following the Phase 1 measures worth 400 billion baht. The additional measures include monthly cash handouts of 5,000 baht to 3 million workers for three months, soft loans worth 60 billion baht for individuals, 10 billion baht for tourism SMEs and 2 billion baht through state-owned pawnshops. Meanwhile, the previously announced measures worth 400 billion baht offer soft loans worth 150 billion baht for businesses, employment assistance lending worth 30 billion baht, deposit returns and lower electricity bills worth 45 billion baht, relaxed debt repayments and tax breaks. The two packages account for about 3% of GDP. With a 42% ratio of government debt to GDP, relatively lower compared with other countries, the government has fiscal space to loosen policy further.

The recent increase in fiscal spending around major economies will likely help support economic recovery once the outbreak is contained. But if the number of infected cases is still rising, these measures may not be sufficient to avert a sharp economic slowdown for many countries over the coming periods. For instance, the number of cumulative infected cases in the US has already surpassed that of China, making the country No.1 in the world in terms of infected patients. Also, the latest climb in unemployment claims to more than 3 million suggests that the economy is on the road towards recession. That said, more measures can be expected over the next few months if the damage becomes clearer. Likewise, Singapore’s Q1 GDP (advanced estimate) has gone down by 2.2% year-on-year or 10.6% on a quarter-to-quarter annualised basis. Sluggish global tourism and trade, as well as social distancing measures, will add to the already-weak economic performance of Singapore.