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A reflection and a warning – Universal Support - The Centre for European Governance

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A reflection and a warning – Universal Support

Universal Support.

Christos Kotsogiannis, Professor of Economics, University of Exeter, and Director of the Tax Administration Research Centre (TARC).
March 26, 2020

Who would expect this three months ago? Certainly, we did not even know that such virus existed! Now the world is facing an ‘invisible enemy’ which has (putting the health crisis and the immediate need to respond to this aside!) disrupted economies and society on the scale that most of us have never witnessed, seeking ways to fight against it. Many countries have taken extraordinary fiscal and monetary policy measures, announcing a plethora of unprecedented fiscal stimulus packages to smooth out consumers’ income and stimulate demand and limit the human and economic impact of COVID-19.

Already significant global production has been lost, and the forecasts for growth are being continuously revised, downwards, as events further develop.No matter how optimistic one is, the current pandemic crisis will inevitably lead to a deep economic crisis with long lasting impact (than the economic crisis of 2008). The sheer magnitude of the pandemic shock makes forecasting incredibly complex. The extent of the lost production will of course depend on how severe and persistent the pandemic is, as well as the measures countries adopt individually and collectively. Stimulating demand, as desirable as it is, will not be enough as the global supply chain is also disrupted (even if consumers’ purchasing power does not change, demand cannot be fulfilled if the global supply side is severely affected by the necessary lockdown).

A crisis of this magnitude requires bold actions. A combination of direct transfers to consumers and support (direct and indirect including deferral of payment of tax liabilities) to businesses is likely to be an effective policy – but getting the mix right for the latter is challenging and will depend on administrative capacity. Delivering brand new administrative systems to administer complex policies is hard, as is to set income and profits thresholds for which assistance policies may depend upon. How much and how quickly resources can get to households and business is therefore a pressing issue. If financial support is difficult to deliver in a timely fashion universal support is the right instrument, even though some ‘non-deserving’ businesses might benefit from them too.

The pandemic is affecting supply, and productivity, of the economy and as such will make business investment more costly. A change also in the way we do things is required. Social-distancing and lockdown policies mean working from home, for those sectors that can. But working from home has its own limitations, and adjusting to this is not only challenging but takes also considerable time. If aggressive demand-boosting policies are not adopted, the incentive of business to invest will be reduced further fuelling a loss in productivity which in turn will fuel even less demand. If not acting decisively, there is a danger that economies will find themselves locked in a ‘low-economic-growth-trap’.

Importantly, to win the ‘war’ against the ‘invisible enemy’ global coordination is needed, as the pandemic is affecting the global economic network. Though there are good signs of this happening already, more needs to be done. We live in unprecedented times, but this is the time where the global community should realise that it is better to coordinate than to compete. This, inevitably might help the global community in solving another big challenge it faces, for example, climate change. When normality resumes, the pandemic experience should make climate change coordination easier to achieve. While the 2008 crisis was more of a crisis of institutions the 2020 COVID-19 pandemic is not. Importantly, the ‘shock’ is symmetric and affects all countries. But how successfully a country deals with the pandemic will depend upon how quickly the institutions have been mobilised. This realisation, and the successful conclusion of the pandemic, can act as a ‘coordination device’ where we consumers, producers, states and international organizations coordinate on a good equilibrium following the social norms consistent with the common good. This might take time but there is hope that for a much better world after we get through this.

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