With England and Scotland moving to their third blanket lockdowns and most of Europe tightening their COVID-related restrictions, the attention of governments throughout the region is turning to the new fiscal effort needed to support the economy until vaccination campaigns succeed in controlling the pandemic.
- U.K. Chancellor of the Exchequer Rishi Sunak announced on Tuesday a £4.6 billion ($6.2 billion) package of “top-up grants” for some 600,000 businesses in the retail and hospitality industries.
- The announcement comes after several government-financed measures since the beginning of the pandemic in March 2020, including a “furlough” job support program due to expire at the end of March.
- The U.K. government spent the equivalent of more than 8% of gross domestic product in immediate direct fiscal spending in 2020 to counter the pandemic’s consequences. That is roughly the same amount as Germany, and significantly more than France, Italy or Spain.
- Other European governments are now considering other rounds of fiscal stimulus to take into account the unexpected severity of the pandemic’s second wave. German finance minister Olaf Scholz last month announced a doubling of Germany’s borrowing plans for 2021, and has stated that he would be ready to spend more if needed.
- Laurence Boone, the Organization for Economic Cooperation and Development chief economist, warned Western governments this week not to rush into austerity to correct levels of public debt perceived as unsustainable. “Interest rates are set to remain low for a time long enough that we can reconsider what we do with fiscal policy,” she told the Financial Times.
The outlook: The current situation doesn’t quite compare with the spring 2020 lockdowns, inasmuch as the end of the COVID-19 pandemic may be in sight: Vaccination campaigns have started throughout Europe, albeit at different speeds, but they should begin to make a significant impact once a sufficient number of people have been inoculated.
The risk, as underlined by Boone, is that governments might panic at the size of their debt loads relative to GDP once the recovery is really in sight — in the second half of the year. And, as she explains, governments should try to avoid the mistakes they made right after the global financial crisis of 2008, by rushing into austerity much too soon.
From the archives (December 2020): The global recovery remains uncertain — here’s why the OECD wants fiscal stimulus to continue