Governments should go all out on fiscal stimulus to tackle downturn
It now looks as if the current downturn will be at least as deep as that caused by the global financial crisis
As the enormity of Covid-19’s probable economic fallout dawns, governments should prepare themselves for equally yawning gaps in public finances. That should not be a cause for alarm. On the contrary, unless government deficits widen to a scale unprecedented, even in the global financial crisis, policy may well be seen to have failed to do its job.
Between 2008 and 2010, the public debt of the Group of Seven large economies rose by 10-25 percentage points as a share of GDP. Government deficits worsened by four to 10 points. Most of that was because of the collapse in GDP, which reduced tax revenues and increased spending on things such as unemployment benefits — the “automatic stabilisers” of government budgets in action. A smaller part was due to the discretionary fiscal stimulus packages deployed in 2009.