Governments' accounts and pandemics

Abstract

PurposeEarly evidence suggests that coronavirus disease 2019 (COVID-19) caused a sharp deterioration in fiscal accounts worldwide. This paper empirically assesses the fiscal impact of previous pandemics and epidemics.Design/methodology/approachUsing a large sample of 170 countries from 2000 to 2018, this study relies on Jordà's (2005) local projection method to trace pandemics' short- to medium-term dynamic impact on several fiscal aggregates.FindingsThis paper shows that (qualitatively) similar responses to those observed more recently with COVID-19 have characterized the effects of previous pandemics. While the fiscal effect has been economically and statistically significant and persistent, it varies; pandemics affect government expenditures more strongly than revenues in advanced economies, while the converse applies to developing countries. The author also finds that asymmetric responses depend on whether a country is characterized as a chronic fiscal surplus or deficit type. Another factor that generates an asymmetric fiscal response is the prevailing phase of the business cycle the economy was in when the pandemic shock hits.Research limitations/implicationsThis paper's findings provide a lower bound to what the current COVID-19 pandemic will inflict on countries’ fiscal situation. That said, the set of pandemics and epidemics used in this paper are geographically more concentrated and did not affect all countries in such a systemic and synchronized manner as did COVID-19 more recently.Originality/valueThis is the first paper to explore the fiscal side of this type of health-related shocks, as most of the literature has focused on the more traditional macroeconomic effects.