Despite the gloom, there are reasons for fiscal optimism

The coronavirus pandemic is of course primarily a social crisis, but the fiscal costs are also important. A sharp and sustained deterioration in the public finances could have major implications for future government spending and taxation. Fortunately, there are also some good reasons to be sanguine.

Let’s begin with the bad news. A slump in economic activity is inevitable and even desirable; we actually want most people to stop doing what they would normally be doing, in order to save lives. However, this will also lead to a surge in government borrowing, reflecting both the direct costs of the fiscal measures being taken to protect businesses, jobs and incomes, and the knock-on effects of a steep fall in GDP on welfare spending and tax revenues.

The headline figures are scary. Given all the uncertainties, it makes sense to talk in terms of ‘plausible scenarios’ rather than ‘forecasts’, and any hard numbers are more than usually dependent on the assumptions made. But the big picture is clear.

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Πηγή: capx.co