• Thematic Paper
    • EN
6.05.2020 38

Emergency fiscal programs: no choice but to increase the (monetized) deficits

Published May 6, 2020

5 to 10 minutes

5 to 10 minutes

The essential

• The large fiscal packages announced by governments to counter the virus crisis aim, so far, at stabilization more than stimulus.

• In addition to funding the emergency response to the virus situation itself, these packages intend to prevent a worsening of the crisis through the financial and household income channels.

• Only part of the amounts recently announced by governments are budget-easing measures, strictly speaking. Of these, there is a larger push in the US and Japan than in Europe so far.

• Other amounts are advances meant to be reimbursed, or (for the largest amounts) government guarantees of corporate debt. Regarding guarantees, the push in Europe is, at this stage, much larger than in the US.

• Within the specific architecture of the Eurozone, European institutions have also played a major part, by lifting restrictions so that member states can deploy their national programs.• A European-level mutualized response is also under way, with a number of programs already decided and larger ones currently being negotiated.

• A European-level mutualized response is also under way, with a number of programs already decided and larger ones currently being negotiated.

• The combined effect of the recession and the whole array of above-mentioned measures on deficits and debt could be, very roughly for large advanced economies given the many unknowns, increases of 7% to 15% in deficits (in GDP terms) and 15% to 25% in public debt in 2020.

• However, the monetization of most or all the additional public debt through the large QE programs announced by central banks will mitigate the damage caused to governments’ debt sustainability.

• Yet, the recently announced stabilization-aiming fiscal measures are not the end of the fiscal easing chapter opened by the crisis. Indeed, they will probably give way to further measures, this time stimulus-oriented, once the confinement measures have been gradually lifted.

• It is also very probable that some of the crisis-fighting fiscal measures, currently presented as temporary will become more or less permanent due to demands of a stronger government role in the economy and stronger social safety nets. If not matched by offsetting revenue raising measures, they may lead to permanently higher structural primary deficits.


To find out more, download the full paper

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