Rishi Sunak the UK finance minister is reportedly planning tax hikes of up to £20 billion to tackle the cost of the coronavirus crisis. According to the Sunday Times, ministers are looking at raising capital gains tax and corporation tax in the next budget, in November. The money could be reportedly raised from pensions, businesses, the wealthy and foreign aid.
Clearly Rishi Sunak faces some unpalatable options because he’s rightly spent many, many billions of pounds supporting the economy and individual workers over the past few months. He is not alone and finance ministers across the globe are grappling with the financial impact of the pandemic.
Europe is still ramping up its stimulus efforts in a range of countries and is committed to a relaxed fiscal policy well into next year. Some EU countries such as Italy with a high debt-to-GDP ratio and borrowing rates that exceed growth are in a particularly precarious situation. Their position is somewhat mitigated due to the fact they were more constrained during the peak of the pandemic and undertook less direct fiscal action.
Let’s not forget that a spike in the level of government debt is not necessarily a problem if governments can maintain fiscal discipline after the economic crisis and are able to achieve the economic growth needed to grow out of this debt pile.
Governments rely on a strong domestic economy for a large part of their income. When consumers and businesses are in a confident mood this has a major positive impact on government income. Unfortunately, many businesses have already downsized, if not gone to the wall, while others face a similar fate. Individual Incomes have declined sharply, and underemployment is rife. Millions of jobs have been permanently lost.
The ability to service loans, even at super-low rates of interest, has thereby been significantly reduced. Meanwhile, uncertainty over the nature of the post-pandemic future has increased and expectations of future earnings have been marked down.
Emerging market (EM) companies are facing an additional problem because of the importance to them of the dollar-denominated debt, and the depreciation of their currencies. Some are already suggesting that some sort of programme of managed debt forgiveness should be instituted.
According to the Brookings Institution, as the pandemic began, the EMs owed around $11T in external debt and faced $3.9T of debt service obligations this year. These figures have already been dramatically overtaken by events.
Some $5.3B of bilateral debt relief has, to date, been provided to some of these nations by the G20 group of countries, but the figure is far below the sum originally hoped for when the virus struck. If poverty is not to increase sharply, and wealth become more polarised, more must be done to support the poorest nations, and payment suspensions extended to some middle-income countries.
Such action could also be supplemented by the provision of ‘pandemic grants’, conditioned on appropriate macro and structural policies, in a similar manner to Marshall Aid following the Second World War.
In the developed world ageing populations and weak productivity growth leave many economies struggling to grow out of their debt problem. The global financial crisis a decade ago and the latest Covid-19 pandemic have added to the debt, and more stimulus may be needed until we find a solution to return our lives to normality.
Getting free from this pandemic is not just about an effective vaccine but also getting our financial house in order.
Gordon is the former president and chief executive of BMMI. He can be reached at [email protected]