Double shock | Covid and war jeopardising global economic recovery 4/07/2022
Fiscal policy is cushioning impact of double shock The governments and parliaments in North America and Europe took swift action in the first months of the year to cushion the negative economic impact of the double shock for low-income households and energy-intensive companies. Most countries have introduced benefit payments and tax concessions for low-income households together with tax concessions on energy products, and price cuts and amended price regulations for energy. In general, targeted and temporary measures to aid low-income households and companies facing insolvency due to the high energy prices are useful whereas general measures to ease the financial burden tend to be unnecessarily expensive for the public purse. The packages of measures also ease the pressure on ongoing collective wage bargaining which, in turn, helps avoid excessive wage increases. Some countries, such as Poland, Romania and Germany, are additionally dealing with increased expenditure for humanitarian aid for Ukraine and for Ukrainian refugees. Many of these packages have a moderate volume (0.5-1.5 percentage points of GDP). With these measures, many states have temporarily left the path consolidation in favour of supporting the economic situation, which is certainly appropriate in these circumstances. Consolidation will then move back up the agenda in 2023. From 2021 to 2023, the International Monetary Fund is expecting an improvement in the structural primary balance each year of around one percentage point of economic output in industrialised countries. While developing and emerging countries improved their structural primary balance by two percentage points in 2021, the IMF is expecting a deterioration of one percentage point this year and an improvement the year after (IMF 2022). There are distinct divergences internationally though. In the United States, the huge consolidation is being continued almost unchanged despite the double shock. In the EU and in the euro area, the general trend this year is expansionary (1.75 percent of GDP) with a slight contraction of 0.5 percentage points on the cards for next year. This forecast includes the investment momentum of the NextGeneration EU scheme. In the EU, the measures adopted to cushion the energy price shock should amount to 0.6 percentage points of economic output, and special humanitarian aid to 0.1 percentage points. Overall, the budget deficits in the EU are still expected to drop from 4.7 percent down to 3.6 percent of GDP as the extra expenditure and reduced income from the Covid measures of 2020 and 2021 will largely have run their course. In 2023, the budget deficit is forecast to drop to only 2.5 percent (European Commission 2022: 45). Japan already adopted an overall package of measures in winter which will have an expansionary effect of a good 1.5 percentage points this year. The country will revert to consolidation next year. Medium-term adjustments in consolidation difficult in view of new tasks In view of the steep rise in public debt in most industrialised countries during the Covid years, consolidation remains an exceedingly challenging task for most countries in the medium term. The weakened economic activity will make this all the more difficult. Furthermore, the positive impact of inflation on state revenues in the short term will be replaced by the negative impact on state expenditure in the medium term, especially as the costs to service public debt will gradually increase as capital market yields rise. Even before the crisis, public households faced substantial direct and indirect future burdens on account of the public investment required for decarbonisation and digitalisation. Now it is primarily Europe, which, in view of the new security situation and its objective to massively reduce its dependency on Russian energy imports, is facing permanently higher expenditure for defence, in many cases to the scale of half a percentage point of economic output, and
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