The global fiscal response to COVID-19: Risks and repercussions

Abstract

Governments around the world responded to the COVID19 crisis (CVC) by aggressively deploying fiscal policy to boost health expenditure, income transfers and increased welfare payments, as well as wage subsidies to firms to retain employees to minimize short term unemployment. A fiscal response was in principle both necessary and timely, but the nature of the responses adopted by governments differed markedly around the world. After describing the global macroeconomic impact of the CVC and its effect on budget deficits and public debt levels, this paper critically evaluates the global fiscal response with reference to comparable historical episodes. The analysis suggests some fiscal responses were too expansive and of the wrong form. The paper then highlights the future macroeconomic risks arising from the highly elevated public debt levels the CVC has caused, concluding that fiscal consolidation rather than further fiscal ‘stimulus’ will be needed to address the parlous fiscal legacy of the crisis.