Picture: 123RF/LEON SWART
Picture: 123RF/LEON SWART

The hangover from the Covid-19 spending splurge is going to make the effects of the global financial crash in 2008 seem like a cheeky lunchtime drink. It’s time to start sobering up.

When the true horror of the coronavirus eventually hit home, governments around the world panicked and went on an unprecedented borrowing and spending spree, dwarfing their response to the global financial crisis back in 2008.

The 20 richest countries have, according to Fitch, spent 7% of GDP, some $5-trillion, on direct fiscal stimulus measures. And, according to the Organisation for Economic Co-operation and Development (OECD), rich countries are set to take on at least $17-trillion of extra public debt as they battle the economic consequences of the pandemic and sharp drops in tax revenues.

However, even though the response to Covid-19 was the same, albeit on a larger scale, as the response to the credit crunch, their roadmap to rebuilding their economies must be markedly different.

There are two ways out of the mess we find ourselves in as we take our first tentative steps back from the brink. We can either try to grow (stimulus and tax cuts), or shrink (slashing spending) our way to recovery.

The first option, which is undoubtedly the correct one, is going to frighten policymakers as it will involve doubling down into the unknown. It will mean they need to borrow and spend at levels the economics textbooks tell them not to, despite that, no matter what they do, the outcome remains uncertain.

By contrast, austerity will fracture already fragile societies, further entrench inequality and create a set of social, health and economic problems that will dwarf the damage the virus has done.

There will be people who argue for austerity as they will see it as the only way to limit tax increases. This just shows not only a disturbing lack of imagination but also a frightening lack of empathy.

So, if we take austerity off the table, what are the options? What can we do to stimulate a recovery without creating a set of even worse problems? If we’re not careful we’ll go from a recovering economy with falling unemployment to Zimbabwe or Venezuela, with near-zero employment levels, food shortages and hyperinflation.

However, unless they are either very lucky or very smart, the impact on poorer countries, home to the vast majority of the world’s population, is going to be cataclysmic

The coronavirus is a global issue and nowhere is going to escape unscathed. Small, isolated and wealthy countries such as New Zealand will suffer less than large, developed and open economies such as the US and UK, where their openness and poorly constructed interventions mean the damage is deeper, both in terms of economic cost and lives lost.

But while their citizens, who have, on the whole, had it very good for a long time, are going to be hammered by the impact of the virus, their governments generally have the wherewithal to make some sort of a plan to ensure there is not starvation on the streets, even in the face of massively rising unemployment.

These countries, and I include China in this number, run the world and have balance sheets and track records that will allow them to borrow and spend their way out of the mess. It’s not fair, but too big to fail does not only apply to banks.

However, unless they are either very lucky or very smart, the impact on poorer countries, home to the vast majority of the world’s population, is going to be cataclysmic. Even if, as unlikely as it seems, the number of deaths in emerging markets doesn’t hit the levels seen in the US and Western Europe, they are not going to see a concomitant lessening of the damage.

Not only will less well-off countries, such as SA, see tax revenues plummet and unemployment stats rocket, but they will be at the mercy of lenders and foreign governments that may be too busy tending their own back gardens to worry about their neighbours.

When the developed economies are hunkered down for the long haul they are not going to spend on tourism and imports as they would have before the pandemic.

The next few months are going to be crucial as governments try and navigate their way through the mess, and now is not the time to retreat back into their old way of doing things. Latest projections from the OECD show the euro area economy shrinking by nearly 10%, with the UK and France both in double digits. The US is expected to drop more than 7% and the global economy will be 6% smaller. These are massive numbers and tell the story of an unmitigated disaster.

In response to this, both the left and the right need to abandon their tired old tropes and focus on finding pragmatic solutions that will work in a world where the old rules simply do not apply. To avoid tax increases, the right needs to be careful not to charge headlong into hardcore austerity measures, while the left needs to avoid rushing to increase taxes to plug fiscal holes.

Both ends of the spectrum need to work together to:

  • Eliminate waste by dispassionately looking at all spending and cutting out that which does not deliver on the front-line. Tough decisions will need to be taken around subsidies and foreign aid.

  • Prosecute corruption to the fullest extent of the law; ensure that state employees are delivering value (are all those managers really necessary?); examine projects to ensure that only those that will deliver tangible benefits to people are retained, and so on. It isn’t rocket science, but it is politically very difficult to pull off.

  • Keep taxes steady at worst and cut them where possible, but definitely try not to raise them, even on soft targets. One exception must be a “windfall tax” on firms that profited from the pandemic. The idea must be to leave as much cash in the hands of citizens as possible without reducing demand more than it has been already.

  • Print as much money as possible. With demand being so low, inflation is unlikely to be an issue and this monetary space should be taken advantage of.

• Wray is a freelance writer based in the UK.

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