Coronavirus and the Fiscal Policy

The coronavirus crisis is expected to impact the world economy in a wide variety of ways. However, another important point to consider is the amount of power and responsibility that it has placed in the hands of the government to manage the crisis. Even the staunchest advocates of the free market are now relying on the government to steer entire nations through the crisis.

The problem is that the government also has its limitations. While the government can utilize the service of its personnel for administrative purposes, it has to understand its limitations and plan accordingly. The biggest limitation is that the amount of money with governments is limited. The manner in which government money is used to influence the economy is outlined in the fiscal policy.

The coronavirus crisis is going to be a test for fiscal policymakers. They are going to face a lot of challenges. Some of these challenges have been described below.

  1. Reduced Inflows: Firstly, governments all over the world will have to collect money from their citizens before they can distribute them to others. The problem is that governments generally make money in the form of taxation. However, because of the coronavirus crisis, they are going to see their tax revenues collapse.

    Countries generally make money from a wide variety of taxes, such as property tax, income tax, sales tax, etc. Any type of tax that relies on current economic activity such as income tax and sales tax is going to take a hit. This is because economic activity is not going to take place in the near future.

    On the other hand, countries that rely on property taxes, interest, and such other sources of revenue will not see their incomes impacted. Regardless of the sources of income, every country in the world is going to see its tax revenue decline. This is going to create a big challenge since it will limit the ability of the government to respond.

  2. Type of Industry: The type of industry which provides employment to people will also impact the government’s tax revenue. For instance, if a country has a large number of information technology personnel, they can continue to work while abiding by the social distancing norms. On the other hand, if a country relies on industries such as fishing, tourism, or manufacturing, they will not see much economic activity and might see their tax numbers dwindle.

  3. Increased Outflow: Governments all over the world are now bound with the responsibility of protecting their poorest. The governments will see very little opposition from the rich as policies to hand out cash to the poor workers are formulated and doled out. This is because even the rich now that the epidemic cannot end until the poor people sit at home and follow social distancing norms. The problem is that people who might need help are in large numbers.

    In many countries, as much as 50% of the population might need a government hand-out. This will obviously put unprecedented pressure on the treasury of various nations. Handling reduced income and increased expenses simultaneously can be a recipe for bankruptcy.

  4. Increased Debt: From the above two points, we already know that the government is going to face a shortfall of cash. This would mean that governments all over the world would have to borrow huge sums of money to survive the day. This would be problematic because of two reasons.

    Firstly, investors would not be willing to invest large sums of money in government bonds. Governments are going to find it difficult even to roll over bonds, let alone being able to borrow more funds.

    Secondly, even if the government somehow succeeds in raising debt, the debt raised today would mean higher interest payments in the future.

    These higher payments would mean that the expenditure of the government would increase, and the revenues would have to be forcibly increased in order to match the budget.

    In other words, taxes all over the world will have to be raised because of the expenses being incurred on the coronavirus crisis today.

  5. Privatization: If the government is already highly indebted, it may not want to borrow more money. In such cases, it could sell over some of its assets to private corporations in exchange for cash. In many countries of the world, governments own utility companies such as electricity, water, or telephone companies.

    If the government sells out these companies, it is likely that the private sector players will charge more money. As a result, consumers will see inflated bills, and hence the cost of living in such countries might rise exponentially.

  6. Reduced Development: Lastly, the coronavirus crisis is going to consume all of the country’s finances. This means that there is no money going to be leftover for bridges, ports, factories, and other such infrastructure spending.

    Developing countries will face the brunt of this problem. Their governments will be under the pressure of immense debt in the near future. Hence, they will not be able to raise any more cash in the near future.

The bottom line is that the fiscal policy of any country is going to be a vital tool to fight the coronavirus pandemic. However, at the same time, low inflows and high outflows are going to make any fiscal decision challenging.

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