This post was written by Cole Stenholm, a Legal Policy Extern from the Texas A&M University School of Law.
Two new reports from international organizations shed light on the coronavirus’s economic impact. A report from the International Monetary Fund (“IMF”) forecasts the American economy declining in 2020, while a report from the Organization for Economic Co-operation and Development (“OECD”) discusses how countries have, and should continue to, respond with fiscal policy.
According to IMF, the United States economy will shrink by 5.9 percent in 2020 because of the pandemic. Before the pandemic, IMF projected 2.0 percent economic growth for the United States. IMF’s report highlights the following:
As countries respond to the virus with containment policies (e.g. quarantines, lockdowns, and social distancing), the economic result includes workplace closures, layoffs, income declines, and uncertainty, all of which disrupt productivity, supply chains, and consumption.
Illustrative of this are jobless claims, which soared in the United States from around 280,000 per week in early March to over 6 million per week in late March. World trade is projected to decline by 11 percent this year, and prices for oil and metals will drop by 42 and 15 percent, respectively. Oil’s decline is, in part, because of reduced demand within the transportation sector, which accounts for 60 percent of oil consumption. Metals’ decline is because of factory closures within China, the United States, and Europe.
Global stock markets have similarly sold off as investors restructure their portfolios to favor cash and safe assets. During this time, the United States dollar has actually appreciated in value by 8.5 percent while many other advanced and emerging economies are experiencing currency depreciations.
Ultimately, the United States economy is projected to rebound with 4.7 percent growth in 2021, but IMF acknowledges that all projections are clouded with uncertainty due to the pandemic.
According to OECD, countries have generally responded by adopting short-term fiscal policies to provide liquidity and income support to businesses and vulnerable households. OECD’s report highlights the following:
Even with short-term fiscal-policy support, businesses remain at risk for insolvency in the long term. This holds true because global corporate debt levels have recently expanded, especially in the United States. From 2014 to 2018, American businesses issued roughly $750 billion in bonds per year. Contrastingly, European countries issued roughly $375 billion per year during the same period.
Low-income Americans, gig workers, and, generally, any American unable to “telework,” are all particularly vulnerable during the pandemic. In the United States, 62 percent of workers in the top-25 income percentile are able to work from home, but less than 10 percent of the bottom-25 income percentile can.
Countries also face long-term tax revenue shortfalls because of lower incomes and unemployment associated with the pandemic. This, combined with the cost of fiscal stimulus packages, is likely to have substantial long-term impacts for government budgets and debt levels.
The United States’ budgetary imbalance already ranked below the OECD average as of 2019. And the United States’ fiscal policy response to the coronavirus will add additional, though likely necessary, imbalance valued at roughly 4 percent of the country’s gross domestic product. Increasing government debt levels generally undermine a country’s ability to use fiscal and monetary policy to address crises, especially for countries susceptible to currency depreciations.
In conclusion, OECD recommends that countries cautiously pursue tax reform after the pandemic, while noting that the best way to restore lost revenue will be via supporting economic growth.
Click here to explore the Concord Coalition’s economic growth agenda.
