Projected Impact of COVID-19 on Government Finances across Selected Countries
Amid the storm known as COVID-19, there have been far-reaching economic impacts on many global governments. The global health crisis has caused governments to reorganize finances in response, contrary to earlier budgets. The following is an assessment of how the pandemic has affected government finances in a few select countries.
Similar to other nations of the world, Covid-19 has hit many of America’s cities. This has had adverse effects on the American economy. The American GDP is comprised of manufacturing (11%), investment (20%), arts, entertainment, and restaurants (4.2%) sectors, among others. As such, the imposed quarantine and lockdowns implemented to slow down the disease’s spread has negatively affected these economic sectors and the county’s GDP (2).
In a nation where the GDP heavily relies on consumption (up to 70%), the business closures, and slowed down spending have caused the GDP to fall below earlier projections. Reduced demand has seen manufacturing businesses such as GM and Ford suspend operations. This has prompted Congress to attempt to maintain spending by passing a $484 billion stimulus package. They will hand out $350 billion as business loans for operations with a staff of less than 500 (2).
Additionally, businesses that do not reduce the wage rate will have the loans given out as grants instead. There are even talks of yet another stimulus bill to keep the trend, provide enough for low to medium-income earners, and to keep the economy going. A more unfavorable effect on expected government funds should be expected with lower taxes remitted in the short-run.
The Italia government raises its finances from taxes, borrowing, social measures, businesses as well as tourism. To curb the extensive widespread of COVID-19, most of these avenues were partially or fully locked, impacting negatively on the government finances both in the short run and in the long run.
This, instead, has led to a direct short term impact on the government finances by setting aside a given budget to cushion its aid seeking citizens from the adverse effects of coronavirus. According to REF Ricerche, a research consultancy based in Italy, the country has anticipated an 8% fall in GDP (1).
This should happen by the end of the second quarter of the year 2020 due to COVID-19. They attribute this 8% fall in GDP to reduced tax revenue due to fall in business operations such as hotels and restaurants and loss of jobs due to lockdowns, among others. The most significant estimated impacts on the government finances are a possible £6.4bn ($8.3bn) loss in the tourism sector (1).
The government has also set aside a budget of $28.3 billion to shield the economy from the severe impact of the coronavirus outbreak, such as supporting workers hit by temporary layoffs and small and medium-sized companies affected by the closures.
The Spanish government has witnessed a substantial negative impact on its finances. The government ended 2019 with a debt of 95.5% and a public deficit of 2.8%. But this will worsen significantly in 2020, due to additionally anticipated slump due to the huge fiscal support set aside to fight the impact of COVID-19.
The total lockdown had a detrimental effect on the government sources of income, like taxes from the citizens and industries. To battle the economic impact of COVID-19, the Spanish government has set aside 100 billion euros from its finances. This is for bank loans to companies that are suffering due to the global pandemic and 26.3 billion euros for a halt on mortgages, social benefit payments as well as tax burdens for hard-hit families, self-employed and companies.
About 4 million workers had lost their jobs by mid-April in response to the strict confinement benefitted from the unemployment benefit scheme, ERTE, which was allocated for about 18 billion euros by the government to cushion the blow of COVID-19’s negative impact. The Spanish government will also face an income loss from 3.6% exports to China resulting from disrupted supply chain through the paralyzed transport system (3).
Multiple car-producing factories have been closed down in Spain as a result of a lack of parts; hence no tax revenue is earned. Overall, the government has projected a 6% shrink in its GDP. As a result of these, government finances might worsen significantly, which could jeopardize public debt sustainability and will hinder longer-term growth (3).
In conclusion, the COVID-19 crisis has resulted in wide adoption of fiscal expansions by different governments across the globe. This mechanism has greatly reduced the aggregated savings hence driving nations into massive debt. So, besides the core goal of cushioning citizens from the severe impacts of the health crisis, the key question for the U.S. and Europe should be focused on how to deal with incurring more government debts in the name of shielding the economy from the pandemic’s effects.
1. Duddu, P. (2020). Coronavirus in Italy: Outbreak, measures and impact. Airport Technology. Retrieved 15 May 2020, from https://www.airport-technology.com/features/covid-19-italy-coronavirus-deaths-measures-airports-tourism/.
2. Miller, C. (2020). The Effect of COVID-19 on the US Economy – Foreign Policy Research Institute. Foreign Policy Research Institute. Retrieved 16 May 2020, from https://www.fpri.org/article/2020/03/the-effect-of-covid-19-on-the-u-s-economy/.
3. Wijffelaars, M. (2020). Home. RaboResearch – Economic Research. Retrieved 16 May 2020, from https://economics.rabobank.com/.