Around the World in Fiscal Responses to COVID-19

Around the world, many governments are rolling out their own sweeping fiscal response packages in an effort to mitigate the economic consequences of COVID-19 containment efforts.[i] Here is a look at some of the major responses we have seen from Europe and North America thus far. This isn’t everything worldwide, and many more provisions may emerge or shift in the coming days. But it should give you a sense of how some of the developed world is responding and what investors should reasonably expect from it, in our view.

UK

Britain’s government has rolled out an array of measures, announced in several tranches.

Sources: Bloomberg and The Guardian, as of 26/3/2020.

We are sure these provisions (and all those that likely follow) will spur lots of debate about the wisdom of the capital allocation, whether the funds could be spent better elsewhere and more. We won’t wade into that here. Rather, we will simply note that this isn’t traditional stimulus in any sense of the term, in our view. We think it is more akin to bailouts, as these measures don’t forcibly boost demand.

A further issue: timing. VAT cuts are immediate, but we don’t think they add money when the issue is business closures. The other measures—like increased welfare, sick leave and grants—may help in the short run, but we think it unlikely any can really offset the impact of interruptions to daily life. We think many of them would actually hit at a lag, suggesting they are likelier to boost the eventual recovery than to spur it, though even then we would temper expectations for an extra-strong tailwind.

US

Last week, the US passed a package called the Coronavirus Aid, Relief and Economic Security (CARES) Act. Here is a look at some of its provisions.

Source: Tax Foundation, as of 26/3/2020.

Here, too, many debate about the wisdom of how this money is spent. Already, commentators we follow in the press are taking issue with the size and efficacy of the small business backstop, considering it relies on banks to issue the loans and the government has given them scant guidance for how this should look. Regardless, we think this program’s structure is vastly different than a typical stimulus package and, like Britain’s, it doesn’t appear likely to materially offset the macroeconomic effects of the crisis.

Germany

Even fiscally stalwart Germany—long considered a bastion of austerity—announced its own fiscal response. On 26 March, the country unveiled a supplemental budget amounting to more than £645.2 billion designed to seemingly counter the crisis’s effects.[ii] Major provisions include:

Sources: Deutsche Welle and Reuters, as of 26/3/2020.

But, like all these measures, we think timing is key—and the German plan offers few details on that front thus far. Here again, the measures are more like bailouts than traditional stimulus, in our view.

France

France is also reconsidering its plans in light of COVID-19’s impact. In mid-March, the country announced it was scrapping its planned budget and near-totally rethinking its priorities. In the new budget:

• President Emmanuel Macron’s long-touted and controversial pension reforms—that would likely have amounted to benefit cuts—are out.[iii]
• On 20 March, the country enacted £263.7 billion in business loan guarantees designed to ensure banks won’t lose out on loans made between 16 March 2020 and yearend—an effort to keep money flowing to businesses.[iv]
• It also enacted £40.3 billion in delayed (and potentially cancelled) tax payments, unemployment benefits and transfers to certain struggling businesses and individuals, including forestalling evictions and postponing utility bills.[v]

The government’s lending assistance is an interesting measure that we think could help businesses that need to roll over credit lines. However, whether banks will be willing to go along with the measure remains to be seen—a fact that we think hinges as much on the ECB and accounting principles as it does the government’s manoeuvring.

Canada

Canada, like the others, has enacted a multifaceted approach aiming to ensure continued credit flow to businesses as well as increase the social safety net. Initially, the government pushed for a bill that would empower the cabinet to tax and spend without Parliamentary approval through 2021, but opposition lawmakers shot it down, and the resulting legislation was, in our view, a compromise across the board.

• The key credit move, in our view: The government announced it would buy up to £86.3 billion in mortgages from banks, a move aiming to infuse them with fresh capital to lend to business and individuals.[vi]
• Separately, the government announced a financial aid package that includes a six-month delay in student loan repayments, expanded unemployment benefits for four months for workers affected by the crisis, wage assistance for small businesses, tax credits and more.[vii]

These measures, which would hit over a period of months beginning in April, are likely to matter much only if the interruptions to business prove lasting—and in that case, they are likely insufficient, in our view. In the other scenario—a quick end to the crisis—they may never be used at all.

Ultimately, whilst fiscal policy can help money circulate some during recessions (extended economic contractions, often defined as two or more consecutive negative quarterly GDP readings), it can’t end them. Nothing here changes our view on that. These measures may help at the margin, but given their structure we doubt they have a material effect. They may even hit too late to matter, depending on the course COVID-19 closures take from here.