Will Financial Incentives be Sufficient to Fight Against Covid-19?

As a result of the negative impact of the novel coronavirus (COVID-19) on the financial markets, the People’s Bank of China (PBOC) cut loan prime rates and the central banks of the developed countries followed the path of interest rate cuts. It is not anticipated that the effects of the virus on the economic system could be so strong in the early stages of the outbreak, but the global spread of the virus and the fact that many countries declared ‘state of emergency’ and their production halted shows that the negative impact of the virus on the economy will continue to increase. These steps taken by the central banks of countries concerned about the recession of their economies due to the problems caused by coronavirus in economic activities were insufficient to reduce the negative impact of the virus on the global economic system, and countries began to announce financial stimulus packages.

Why Financial Stimulus Packages Are Preferred?

If the resulting financial crisis spread over firms and households, the financial incentives created by the states are very important because the impact of these incentives on aggregate demand is high. If the financial incentives prepared are made by taking into account the characteristics of the crisis, the economy can also be revitalized even for a while by creating additional demand along with fiscal policy. Under fiscal policies, when consumption and investment expenditures are increased, the level of national income and employment can be stable, thus preventing contraction in the economy.

What Happened in The Past?

The fiscal policies created by the states in the fight against the coronavirus crisis were also implemented in the global crises of the past. The idea of countries experiencing economic crisis to use fiscal policies to reduce the severity of economic fluctuations goes back to the Great Depression of 1929. In 1933, when the impact of the crisis was felt most intensely, several fiscal policies were applied after Roosevelt was elected the President of the United States. In this context, large lending opportunities were provided to banks, industries, and houses and farms under mortgages. In addition, in order to prevent unemployment, half a million unemployed were employed in reforestation activities under the control of the army.

After the global crisis that erupted in the United States in September 2008 and spread rapidly around the world, worldwide unemployment rates began to rise. Therefore, European countries have announced various packages of economic and social measures to prevent the crisis from leading to higher unemployment risks. In this context, EU countries developed various fiscal policies in order to support the labor market. In particular, social safety networks were strengthened by expanding the scope of unemployment benefits and social benefits, and resources for the active labor market increased to help those who lost their jobs find jobs. In some European countries, measures such as temporary unemployment payments and short or flexible working hours were taken to protect the existing labor force. In addition, some countries reduced income taxes to protect household income, thereby protecting consumption and maintaining business activities. Also, to support small and medium sized companies with high growth potential, public loans, guarantees, and direct subsidies were provided, or improvements made in the current programs. In addition, the automotive sector, where the biggest investments took place, was strongly supported in the United States and Turkey when the crisis hit. With these measures, the social effects of the economic crisis and its effects on the labor market were tried to be reduced while the improvements at the company level were tried to be facilitated. The positive impact of fiscal policies, which act as an auxiliary role in the process of exit from the crisis, on economies coming out of recession and regaining growth cannot be ignored.

Financial Incentives Announced Within The Scope of The Fight Against The Virus

Faced with the risk of a Coronavirus-induced global crisis in 2020, countries continue to use their fiscal policies to combat the crisis, as they did in the past. Many countries announced that they will provide cash support to international airlines, especially announcing that the most hit sectors of coronavirus (tourism and services) will pay less or no taxes in 2020. In addition, it was reported that cash will be provided to small and medium-sized companies. Here are the financial incentives that countries announced for fighting against coronavirus.

China

The outbreak in China, a hub of global production and exports, caused the country to be quarantined. The fact that China had been under quarantine for a long time affected the country’s economy quite badly. That’s why the government announced it is preparing a budget worth $ 16 billion to combat the pandemic. Chinese Deputy Finance Minister Xu Hongcai said in early March that $ 10.3 billion of the budget for fighting the virus had been spent, while the rest would be used further in the process.

Japan

The first package announced by the Japanese government to combat coronavirus included $ 110 for each citizen, $ 9.18 billion in loan support, $ 3.8 billion in medical personnel, and schools that had halted activities, and $ 4.5 billion in low-cost loans for companies. With this, the total incentive rose to $ 19 billion after Japanese government approved the second stimulus package.

Reports last week said Prime Minister Shinzo Abe was working on a new stimulus package worth $ 193 billion.

USA

The United States, which has the highest Corona budget, announced a $ 1 trillion stimulus package. The United States also approved a $ 7.8 billion emergency spending budget on March 6 and took comprehensive measures for the economy as the virus epidemic spreads rapidly across the country. US President Donald Trump gave his approval for a second stimulus package last week. This package includes items such as assistance to states, food assistance to the poor and expanding paid sick leave requirements. A third stimulus package is expected to be signed in the United States. The third package involves 500 billion for citizens. In addition, Donald Trump’s trade adviser Peter Navarro announced that they will provide US airline companies with a package of loans worth $ 50 billion as part of the fight. Looking at the latest developments, White House official Eric Ueland said senators and Trump administration officials agreed on a $2 Trillion Coronavirus Rescue Package. With the third package approved, the budget allocated by the United States to the fight against coronavirus was above 3 Trillion USD.

UK

As coronavirus increased its negative impact on economic activities, the UK also began to take economic measures against the virus. The UK Government announced it would buy shares from large companies, give 10,000 pounds in cash to the smallest 7,000 firms, abolish taxes on tourism, services sectors in 2020 and postpone home loan payments by three months. The value of this package is $ 412 billion.

Europe

One of the largest packages announced in the fight against the virus is Germany’s package worth 614 billion. Announcing the package on March 15, German Economy Minister Peter Altmaier said they would guarantee a loan worth $ 614 billion, adding that no health care companies and workers will have problems in the process. The last time Germany opened such a large amount of credit to its companies was in the financial crisis of 2008.

Italy, which has been fighting coronavirus since February, has the highest number of casualties due to the virus outbreak. In Italy, the Prime Minister’s decree to support the economy against coronavirus was approved. A 25 billion-euro package was put into effect in order to support families and their initiatives. Also, Prime Minister Giuseppe Conte had demanded budget flexibility from the European Union.

France announced that it will offer companies bank loans worth $ 327 billion and delay payments on tax and social security premiums. Besides, it was announced that 45 billion euro would be used for those who were laid off. French Finance Minister Le Maire said in a statement that large companies could be nationalized if necessary.

In Spain, where the number of virus-related cases and casualties is high, a package worth 200 billion euros were prepared to combat the economic effects of the outbreak. Spain’s Prime Minister Pedro Sanchez stated that at least 600 million euro were allocated for the care of the elder people.

Turkey

After a meeting last week to coordinate the fight against Coronavirus, President Erdogan said several economic measures were taken because of the virus. In this context, a package called ‘Economic Stability Shield’ worth 100 billion TRY was announced to inject liquidity into the market. Turkey’s total budget for combating coronavirus is worth $ 15.3 billion. New stimulus packages are expected to be announced due to the increased impact of coronavirus on the economic system.

What Will Happen?

As in past financial crises, many countries are currently trying to curb negative effects on economic activities with measures such as monetary policies and fiscal policies. The problem here, however, is that the virus crisis is different from other global crises caused by the financial system. The fact that people cannot leave their houses and that most firms temporarily halted their production is preventing the economic system from working. It is clear that the problem here is demand-oriented. The fiscal policies that countries started to implement as part of the fight against the virus are now acting as a buffer in the economy. The financial incentives announced include delaying company debts, cutting taxes and granting cash. If coronavirus continues to spread all around the world and no treatment or vaccine is found, these measures will have no function, because people will not spend. Therefore, the exit from this crisis depends on preventing the spread of the virus and developing the vaccine for COVID-19. While it is not known how long the process will take, for now all countries can do is continue to support economies with appropriate fiscal policies.