Economics of pandemics – Fiscal policy

The COVID-19 pandemic can be described as a twin crisis: a global health emergency and a global economic collapse. This unusual characteristic of the crisis, a mixture between epidemiology and economics, makes the problem a challenging one. While saving lives is indeed the utmost priority of all countries, at the same time, the stake cannot be higher for economists to get policy measures right as the duration of economic duress is directly correlated to the developments of the pandemic.

The global shocks resulted in simultaneous disruptions to both supply and demand in the world economy. On the supply side, disruptions occurred due to infections reducing labour supply and productivity, while lockdowns halted business activity and eventually led to some business closures. On the demand side, unemployment and the loss of income reduced household consumption which worsened economic prospects.

One of the major schools of economics, Keynesian Economics advocates for government intervention to stabilize an economy. Keynesians believe that consumer demand is the primary driving force in an economy, thereby supporting expansionary fiscal policy measures to moderate booms and bust in the economy. According to the International Monetary Fund (IMF), “Fiscal policy is the use of government spending and taxation to influence the economy.”

But, should fiscal policy be geared towards helping those who are directly affected or implement measures to increase aggregate demand? In other words, should policy measures be aimed at an individual level rather than a broad macro-economic stimulus?

In my opinion, the objectives of any fiscal policy response to the pandemic should fall under the following categories: (a) to deal with the health crisis, (b) to support individuals at the household level, (c) to bolster business activity, and (d) supporting aggregate demand. The World Bank acknowledged that countries around the world did in-fact adopt a wide range of fiscal measures to provide financial support to businesses and households, and to improve the capacity of the health sector in response to the pandemic.

According to the IMF, some key fiscal policy responses implemented by Trinidad and Tobago as of June 30, 2021 are as follows:
“The fiscal package of March 23, 2020 included (i) salary relief for up to 3 months to workers who are temporarily unemployed or have reduced income; (ii) VAT and income tax refunds to individuals and SMEs; (iii) liquidity support to individuals and small businesses via credit union loans at reduced interest rates and long repayment periods; (iv) grants to hoteliers to upgrade of their facilities; (v) food, rental and income support for low-income vulnerable groups; and (vi) import duty and VAT waivers on imports of certain medical and emergency supplies.
On October 5, the Ministry of Finance announced an extension to December 2020 of salary relief and income support grants for workers in the creative and cultural industries.”

While the policies implemented thus far have provided some relief, policy makers will continue to face difficult decisions even with the rollout of vaccines. The health and economic crisis is far from over, therefore fiscal policy instruments in tandem with other measure will remain critical to negate the pandemic effects and support economic recovery.