Vaccinating the Economy: Will Government Bailouts be Enough?

The UN has estimated that in 2020 the global economy could shrink by up to 1% due to the COVID-19 pandemic, instead of grow by 2.5% as it was originally predicted. Economists have warned that the damage from the coronavirus crisis could be similar to that from the 2008 recession. From announcing tax cuts and massive rescue packages of loans, through to offering grants for businesses, governments across the globe are spending big in a desperate attempt to stop the coronavirus pandemic wrecking the economy. But whose approach is the best? Below we explore what some of the major economies are doing to mitigate the risks that the pandemic poses.

US

In the US, all 50 states have declared emergencies with governments at the local, state and federal level taking action to ease the financial burden on Americans. Trump’s administration and Congress agreed on a $2 trillion stimulus package, which includes income support of $1,200 per adult and $500 per child and starts phasing out for individuals who earn $75,000 per annum or $150,000 for couples. Loans worth $367 billion have been offered to small businesses struggling with the immediate drop in revenue due to the pandemic. The government will not expect the businesses to pay the money back if they manage to retain most of their employees over the next six months.

In the form of loans, loan guarantees and purchases of companies’ corporate debt, the legislation provides a total of $454 billion which will help large and medium-sized business access capital during the crisis. $58 billion have been set aside to help American airlines through loans and grants and $17 billion will be provided to help companies that are critical to maintaining national security.

UK

In March, UK Chancellor Rishi Sunak announced a £350 billion emergency package for the economy[1] which consists of state loan guarantees worth £330 billion along with a further £20 billion of handouts for struggling businesses. He also promised £12 billion in emergency support in the budget, a one-year abolition of property taxes for all companies in affected sectors and suspended business rates for many firms.

The Chancellor also added a generous £9 billion scheme to support up to 3.8 million self-employed workers hit by the impact of the pandemic. 95% of the country’s self-employed people are able to access a grant of 80% of their recent average profit (capped at £2,500).

The government also announced a job retention scheme which offers compensation in full for employment costs of up to 80% of salary bills for workers that companies can’t provide work for, but are kept on payroll.

Germany

The German finance and economic ministers have vowed to make unlimited financing available to individuals and businesses as part of the country’s efforts to immunise Europe’s largest economy from the COVID-19 impact. The government promised that there will be no upper limit on the aid that will be offered to companies that are affected by the crisis.

The government has set aside a “supplementary” €156 billion budget for 2020[2], which includes a €50 billion plan to provide direct grants to small businesses and self-employed people who can’t access bank credit. Businesses with up to five employees are eligible for a one-off grant of €9,000 for three months, whilst those with up to ten employees will receive €15,000.

The government has also set up a €500 billion bailout fund to recapitalise big companies with more than 250 employees that face struggles due to the crisis. Landlords are also not allowed to evict tenants who fail to pay their rent due to the pandemic.

The country’s also expanding its programme of export credits and other additional guarantees to help struggling companies and has committed to deterring “billions of euros” in tax payments. Germany is also compensating individuals who are sent home by their employers due to the lack of work for them. The government anticipates that the scheme will cost the Federal Labour Office €10.05 billion.

France

Like many of his colleagues from across the globe, French President Emmanuel Macron has guaranteed that the French Government will offer unlimited support for individuals and companies that have been affected by the global pandemic, which will cost the country €45 billion. He’s also committed to offering grants to workers who have found themselves in unemployment due to the pandemic crisis. France’s Minister of the Economy and Finance has also promised €300 billion of French state guarantees for bank loans to companies, as well as €1 trillion of such guarantees from European institutions.

The government has also suggested the possible rescue of companies such as Air France, which have state shareholdings, and has deferred company tax and social security payments. It’s also offered sick leave payments to parents who have to stay at home to take care of their children due to school closures.

Economists have warned that the damage from the coronavirus crisis could be similar to that from the 2008 recession.

Italy

Italy has begun distributing funds from the fiscal rescue package, totalling up to €25 billion, promising that “nobody will be left alone”. €1.15 billion of this has been distributed to their health system and €1.5 billion has been offered to the civil protection agency, which has been working on Italy’s coronavirus response.

Additionally, self-employed people have been promised one-off payments of €500 per person, companies that pay redundancy payments to their employees have been offered support, there’s been a freeze on any worker lay-offs, and people who are still working during this time have been offered bonuses.

Businesses hit by the pandemic have been promised loan guarantees and a moratorium on loan and mortgage payments is expected to be put in place. Financial support will be offered to families with children, as well as taxi drivers and postal workers who have to continue working during lockdown. The government also announced plans to financially support Italian airline Alitalia.

Spain

Spanish Prime Minister Pedro Sánchez has described the government’s coronavirus rescue package as the “biggest mobilisation of resources in Spain’s democratic history”. It includes €100 billion of state loan guarantees for companies aimed at ensuring liquidity, specifically for small and medium-sized companies. The whole package will amount to €200 billion.

Mr Sánchez has also announced a moratorium on mortgage payments for people who have been hit hard by the pandemic and a similar moratorium for utility bills. He’s also suspended some social security payments and has set aside €600 million to help people who depend on social services.

 

[1] https://news.sky.com/story/coronavirus-330bn-of-government-backed-loans-for-businesses-11959156

[2] https://www.ft.com/content/26af5520-6793-11ea-800d-da70cff6e4d3

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