- The fiscal measures announced by the governments of developed and developing countries are unprecedented in scale, but they differ significantly in terms of GDP. This commentary analyzes the fiscal packages of a number of developed and developing countries, whose combined GDP represents 65% of the world’s total GDP. The analysis covers the US, Germany, France, Italy, Spain, the UK, Japan, China, South Korea, Brazil, Russia, Kazakhstan, and Belarus. These countries have announced fiscal stimulus measures for their economies ranging from 0.2% to 36.6% of GDP. These budget packages differ significantly due to measures being applied in conjunction with the initiatives of monetary authorities, and also due to the fiscal packages of certain countries being supplemented by support measures from supranational institutions. In Russia, the fiscal package amounts to 2.6–2.8% of GDP. Taking into account the total loss of budget revenue, this amount exceeds 5.5% of GDP.
- State guarantees dominate in the structure of the fiscal packages of the analyzed countries. Fiscal packages usually consist of three parts that have different effects on the current year’s budget balance. Direct budget expenditures lead directly to an increase in the deficit, while tax breaks, including social payments — deferrals and cancellations — only partially do this. Government guarantees and measures to maintain the liquidity of the private sector can lead to increased budget expenditures in the future. The structure of budget support in Russia is currently dominated by tax breaks and government guarantees (totaling about 2.4% of GDP), while direct additional budget expenditures occupy a smaller share in the total package (<0.4% of GDP).
The fiscal measures announced by the governments of different countries are unprecedented, but they differ significantly in terms of GDP
The governments of developed and developing countries analyzed by ACRA have announced various fiscal measures aimed at supporting their economies. According to ACRA’s calculations, these measures involve allocating from 0.2 to 36.6% of GDP as of April 20, 2020. These indicators have been calculated taking into account government guarantees and liquidity support; without them, the upper limit of the range decreases to 22.0% of GDP (Fig. 1).
According to ACRA, the considerable variation in the size of fiscal packages is due to at least two main reasons.
1. Many national governments have enacted fiscal measures in conjunction with the initiatives of the monetary authorities to maintain financial stability (the ratio of these measures varies significantly depending on the country). The majority of central banks have cut their key rates and significantly expanded liquidity programs (both in national and foreign currencies) in order to support the availability of credit. The world’s largest central banks, including the US Federal Reserve, the ECB, the Bank of England, and the Bank of Japan, have resumed their quantitative easing programs to keep long-term interest rates at a low level, stimulate the risk appetite of investors, and support demand for the securities of different issuers, including corporates.
It is noteworthy that fiscal packages are quite substantial in the countries that have fewer opportunities for traditional monetary stimulus due to extremely low interest rates (for example, the US, Japan and Germany). This can be explained by the fact that traditional monetary incentives in these countries are expected to be less effective than targeted fiscal and non-traditional monetary incentives (quantitative easing programs) that help governments place public debt at relatively low rates. Developing countries have also announced government asset purchasing programs (for example, Brazil, one of the analyzed countries).
2. The variation in the sizes of the fiscal packages in Eurozone countries between Germany, on the one hand, and Spain and Italy, on the other, is most likely due to the latter’s hopes that domestic demand will be supported through the budgets of supranational institutions. These countries have introduced the most stringent quarantine regimes with serious economic consequences, while the ability of these countries to implement countercyclical fiscal policies is limited due to the relatively high level of their debt loads.
According to the plan recently agreed upon by the Eurozone finance ministers, the following measures have been selected to support the economies affected by the coronavirus. The fund of the European Stability Mechanism (ESM) will provide Eurozone governments with loans at a below-market price of EUR 240 bln, which should not exceed 2% of GDP per country receiving aid. In addition, there will be a fund to finance employment support programs (Support to mitigate Unemployment Risks in an Emergency, SURE) of up to EUR 100 bln and the European Investment Bank will increase the volume of lending to companies under the program by EUR 200 bln. The last two measures will be available not only for Eurozone countries, but for the EU as a whole. At the same time, the European Commission has allowed to redirect unabsorbed European structural funds (around EUR 37 bln) within the seven-year European budget, whose main beneficiaries are the Central and Eastern European countries, in order to respond to the pandemic (Coronavirus Response Investment Initiative).
It is important to note that Figure 1 shows only the fiscal packages announced by governments to support the economy during the crisis. These packages are not equal in size to the increase in the budget deficits of the countries analyzed in ACRA’s sample, since the calculation of the budget deficit must also include lost revenues due to a decrease in GDP and other tax bases. In addition, automatic stabilizers remain outside the calculation framework (for example, the increase in spending on unemployment benefits when the number of people applying for them increases).
In Russia, the fiscal package amounts to 2.6–2.8% of GDP. Taking into account the total loss of budget revenue, this amount exceeds 5.5% of GDP.
Figure 1. Fiscal packages and state guarantee and liquidity programs announced as of April 20, 2020, % of 2019 GDP
* The increase in expenditures includes EUR 100 bln for buying stakes in troubled companies; the amount of tax breaks is based on an estimation from the Bruegel Institute.
Sources: ACRA, the Bruegel Institute, Reuters
1 Not including guarantees or credit lines from national development banks.
State guarantees dominate the structure of fiscal packages in different countries
Fiscal packages in different countries have a lot in common in terms of structure. Change in the current year’s budget deficit and the debt load will depend on the combination of various measures. Fiscal packages generally consist of three main parts (Fig. 1).
1. Measures that directly increase expenditures and budget deficits. These include direct budget expenditures such as:
- Financing significantly increased medical expenses for the purchase of special equipment, protective clothing, etc.;
- Providing direct cash payments to households (as well as employees and the self-employed), increasing unemployment benefits, subsidizing wages in troubled companies, supporting the self-employed, direct support to large companies in the industries most affected by the pandemic (such as air transport), additional capitalization for development banks and the creation of designated funds to support the economy (Germany).
2. Tax and social payment relief in the form of deferred or canceled tax payments. This type of support increases the budget deficit only insofar as it annuls the tax burden. Measures aimed at providing revenue deferrals reduce the budget revenues of the current year but assume tax payments will be made in the next year.
3. State guarantees as well as funds that provide liquidity on a repayable basis. This type of support is not accompanied by a direct increase in budget expenditures but may lead to their increase in the future due to the materialization of assumed contingent liabilities. State guarantee programs are one of the most important support instruments used in developed countries (e.g., the UK, Germany, France, Spain). These programs are designed to support the liquidity of the private sector by facilitating its access to the capital market. A similar type of support can be seen in the measures of countries such as China and Brazil, which intend to increase the volume of lending to economic entities with the help of state banks (these programs are quite difficult to quantify, therefore they were not analyzed).
The ratio of various support measures analyzed by ACRA suggests that these packages are dominated by state guarantees — measures that have the least amount of impact on the balance of the current year’s budget. State guarantees in the analyzed countries accounted for an average of 6.6% of GDP, measures related to direct budget expenditures accounted for about 3.6%, and tax breaks accounted for an average of 2.5%. If countries that do not resort to state guarantees are excluded from the sample, the average value of these guarantees increases to 7.8% of GDP.
Tax breaks and state guarantees currently dominate the structure of budget support in Russia (totaling about 2.4% of GDP), while direct additional budget expenditures occupy a smaller share in the total package (<0.4% of GDP). According to ACRA, this is due to the government’s commitment to the fiscal rule for the federal budget. This rule, even in a recession, does not provide for an increase in expenditures exceeding additional non-oil and gas revenues and additional privatization revenues (Article 213 of the Budget Code of the Russian Federation). ACRA does not expect these types of revenues in 2020 apart from the return of part of the cost of purchasing Sberbank shares (0.9% of GDP).
