Essay on Global Impact of COVID-19 Pandemic

‘The COVID-19 pandemic and the attempts by governments across the world to halt its
spread represent a standard macroeconomic shock. Critically discuss the ability of
expansionary fiscal and monetary policy to limit the current economic recession and promote
economic growth’.
The outbreak of the current COVID-19 pandemic has delivered an unprecedented shock for
economies around the world and has brought along with it fears of entering a global
recession. Restrictions to contain the spread of the virus have put pressure on economic
activity as all over the world, supply chains and production have been disrupted and demand
has weakened causing expectations for future interest rates and inflation to fall even further.
Consequently, the fall in real GDP in 2020 is forecast to be the deepest recession experienced
by the UK for over 300 years (Giles, C., 2020.) In this essay, I will compare the responses of
economies including the United Kingdom, China, Italy, and the United States from a
governance perspective and how they have used fiscal stimulus measures and monetary
stimulus from central banks to meet these economic challenges.
Fiscal policy is a stabilization strategy that is carried out by governments to reduce
inflationary gaps and is often used when an economy is in recession and producing below its
probable GDP. Expansionary fiscal policy is used to avoid a recession by stimulating the
economy by increasing aggregate demand levels to full capacity. This response is through
maximising government expenditure or increasing consumers purchasing power by raising
disposable income through tax cuts. The success of fiscal policy measures depends on the
size of the multiplier which is the total change in the output caused by an initial change in
government spending. If the multiplier effect is significant, then changes in government
expenditure will have a greater impact on overall demand.
Measures designed by governments to tackle the pandemic, such as a nationwide lockdown
and social distancing have led to a rapid decline in economic activity as closed businesses
have caused a widespread strain on households through sharp reductions in incomes and jobs.
High unemployment means there is an excess supply in the labour market and indicates the
economy is operating below capacity and is unproductive. According to the Bank of England,
a surge in new universal credit claims suggests the unemployment rate has risen from 4% to
9% (Saunders, M 2020) because 32% of businesses in the UK will have temporarily laid-off
staff by early April. (Shretta, R, 2020) One way the UK government has tackled
unemployment is through fiscal policy methods like The Job Retention scheme. The Job

Retention scheme cost £54 billion as the government continues to pay 80% of employee
salaries who were kept on by their employer while unable to work. As a result, 8.9 million
workers were covered by the scheme at its peak in May 2020 and since then it has shrunk to
3.3 million. (Cabinet Secretary for Finance and the Economy, 2020) Consequently, millions
of jobs have been protected, conveying those wage subsidies have been an effective way of
delivering income support and curbing the number of job losses. This response will help
speed up recovery, therefore, promote economic growth as it means businesses will be able to
retain their employees through the pandemic and will avoid the costly process of rehiring and
retraining workers once normal life resumes. Moreover, the fiscal policy has shown signs of
being effective as the UK economy is expected to expand by 7.25% this year (Chan, S.P.
2021) and N.I Jobs suggests that employers are planning to recruit as lockdown comes to an
end with job listings up by 40% compared to the final quarter of 2020. (Campbell, J 2021)
However, so far, the scheme has been financed by the government and it is not yet clear
whether some businesses will still retain staff once the costs start to fall directly on the
owners, therefore, unemployment numbers will rise but nowhere near as high as it could have
been.
Likewise. another useful policy tool to promote economic growth is income transfers. In the
U.S, the Biden Administration has passed a $2 trillion stimulus package to mitigate the
impact of the pandemic by providing immediate support to households. Consequently, relief
money, extended unemployment subsidies and qualified households given sent one-off
cheques for $1400 have been effective as the economy grew at an annualised rate of 6.4% in
the first quarter of 2021. (Sherman, N 2021) As well, fiscal stimulus measures have primed
the economy for a consumer boom with customer spending hitting a 14-month high and
personal income increased in the second quarter of 2020. Additionally, the government of
Hong Kong used targeted cash benefits of HK $10,000 to deliver support quickly to all
residents financially affected by the pandemic. Subsequently, peoples purchasing power will
increase, leading to a growth in GDP. (Woodhouse, Lockett, Wong, Liu 2020) However,
economic growth depends on people feeling safer and more confident about spending as
more than half of those surveyed said they would keep the money in savings, suggesting that
many households remain cautious about the economic outlook. (Chan, S.P. 2021). On the
other hand, economist Keynes argued in a recession, there are surplus savings, so there will
be no crowding out and fiscal policy will be effective in boosting demand and preventing
recession. Ultimately, the pros outweigh the cons as vulnerable people will get by and

households will be confident enough to spend once regulations ease, thus, promoting
economic growth.
Nationwide lockdowns have led many businesses to experience a severe fall in revenue and
related cash flow problems. Consequently, to provide additional support to sectors affected
by the pandemic, the UK government has pledged £330 billion through the government-
backed Covid-19 emergency loan scheme to support companies that were running out of
cash. The Bounce Back Loans Scheme announced in April 2020 offers all smaller businesses
loans up to £50,000 and is 100% backed by the UK Government. These schemes have
provided an important lifeline as 1.6 million companies in the UK have been successful in
applying for one of the four loan schemes launched by the Treasury during the first
lockdown. (HM Treasury, 2021) Resultantly, supporting businesses will allow owners to be
able to pay their rent, salaries, suppliers, or buy stock which will help lessen the adverse
economic impact of the COVID-19 crisis.
Similarly, an additional fiscal policy tool used in recession to encourage consumption and
thus, GDP growth is reducing taxation. Lowering income tax will increase the spending
power of consumers, which is an element of aggregate demand, leading to higher economic
growth. In Italy, the government cancelled the first semi-annual payment of the IRAP tax for
all SMEs in 2020 which amounted to just under four billion. Consequently, reducing the
financial burden on SMEs and providing liquidity support. Furthermore, the Italian
government also introduced a tax credit for the tourism sector giving 500 euros per family for
private spending in 2020. (KPMG, 2020) Likewise, a similar method has been used in
Northern Ireland where 1.4 million adults will be eligible to apply for a pre-paid card worth
£100 to spend in their local high street. (Rothwell,C. (2020) As a result, the scheme is
designed to stimulate local businesses and will have a multiplier effect that will help
encourage customers back, which will allow the economy to recover strongly once lockdown
eases. Moreover, in China, local governments allowed businesses to retain 5% more tax
revenue from May to June last year and promises to reduce taxes by an additional 550 billion
yuan this year to consolidate its economic recovery. As a result, massive tax cuts costing a
total of 2.37 trillion yuan (KPMG, 2020) have played a key role in China’s rapid recovery as
the economy grew by 2.3%, the only major economy to report a growth in 2020. (Vaswani, K
2021) However, there is growing concern about a more sustained acceleration in inflation,
which could lead to having to raise interest rates sooner than expected.