Over the past four decades, every country has progressively reduced the role of the government in economic management and allowed market forces to guide the economy. In fact, several ruling dispensations currently in power in major economies received support from their electorate for promising, among other things, smaller governments. In India, after getting the popular mandate in 2014, Prime Minister Narendra Modi had declared that his endeavour would be to provide “minimum government, but maximum governance”. US President Donald Trump had promised similarly to reduce the government’s role in his election pledge, through reduction in government expenditure and jobs, and by lowering taxes, both on corporates and individuals.
The Covid-19 pandemic is fast changing this trend towards a small government, with advanced countries leading the way. In these countries, the governments have announced considerable increases in fiscal spending for reflating their economies, by supporting businesses and through welfare measures to support individuals, and also by increasing spending on certain key sectors. The economic stimulus packages have varied between 10% of the GDP for the world’s largest economy and almost 30% for the fourth largest, Germany. Until now, the Indian government has been lukewarm towards the idea of a large economic stimulus package, but this could all change soon.
The Confederation of Indian Industry (CII) has made a strong suggestion to the government to announce a package that should be at least 7% of the GDP. Surely, times have changed.The stimulus packages are already signalling three crucial changes. First, governments are now faced with growing deficits and debts, a far cry from the fiscal discipline that they had espoused. Secondly, governments are beginning to play proactive roles in areas like healthcare, whose weaknesses were exposed by Covid-19. And, finally, the focus of government spending has largely been on boosting domestic demand, which would have implications for these hitherto globally integrated economies in the post-Covid world. The stimulus package provided by the US, also the largest till date, provides a useful reference point to gauge these changes.
The US Congress provided the first of the three stimulus packages, authorising $2.2 trillion through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. An additional stimulus of $2.3 trillion came from the country’s central bank, the Federal Reserve, and in late April, the US Congress approved a further package of nearly $500 billion.
The Congressional Budget Office (CBO) has estimated that the US fiscal deficit for Fiscal Year 2020 would increase to $3.7 trillion, or 18% of the GDP. Based on the current levels of spending, the expectation is that the fiscal deficit for FY21 would be close to $2.1 trillion or close to 10% of the GDP. Simultaneously, the levels of government debt would register substantial increases, which, according to the CBO, would be larger than the country’s GDP. And this rising trend is likely to increase even further in the following years. Debt relative to GDP is projected to be 20 percentage points higher at the end of 2020 and 26 percentage points higher at the end of 2021. Thus, what is unfolding for the governments is a phase of fiscal adjustment that could run some distance.
The US stimulus packages revealed that the government is focusing on spending in areas like healthcare, whose failings were exposed in the course of the pandemic. This is an interesting development for the Trump Presidency as it had made getting rid of Obamacare one of its main political planks, while remaining ambivalent on its commitment towards healthcare funding. But given the growing sensitivity of this issue for the country that has been the worst hit by the pandemic, the Trump campaign could sound different in the re-election year.
The most significant component of the stimulus packages provided by all advanced countries has been on beefing up domestic demand. In the US, the CARES Act has authorised nearly 28% of the overall spending to support individuals who would now be seeking unemployment benefits as the rate of joblessness has spiked to nearly 15%. Last week, the numbers seeking such benefits swelled to over
33 million, raising the spectre of the worst unemployment rate, surpassing even the levels seen during the Great Depression in the 1930s.
Reviving domestic businesses, both big corporations and the small businesses, is the most prominent feature of the CARES Act. Almost $850 billion, or over 42% of the entire package has been committed in the form of loans and loan guarantees, and other investments. Small businesses, or those with 500 or fewer employees, can receive loans up to $10 million, which can be forgiven if their workers stay employed through the end of June.
For the Trump Presidency, revival of domestic manufacturing has been among its prominent aspirations, and which is in serious business now as the administration has backed the earlier rhetoric with large financial backing. If this programme goes ahead as proposed, a change in the orientation of the US economy could surely be on the cards. Would it then mean that globalisation could see a “new normal” in the post-Covid phase?
Professor, Centre for Economic Studies and Planning, School of Social Sciences, JNU