Governments Find It’s Easier to Provide Virus Relief Than End It

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Within 24 hours of Australian Prime Minister Scott Morrison’s announcement this month that his government was scaling back crisis support for childcare providers, Frances Crimmins was inundated with calls and emails from parents pulling their kids out of the centers she runs.

“It really was like a slap in the face to this sector,” said Crimmins, CEO of YWCA, which operates six early learning centers in Canberra.

Australia’s success in containing the pandemic is allowing it to dial back the emergency support for some industries. But exiting such programs is already proving harder than starting them, a dilemma fellow developed-nations are also starting to face.

“The decisions for broad based support was the right thing to do,” said Takatoshi Ito, an economist at Columbia University and former senior official at the Japanese finance ministry. “But the challenge is how to withdraw.”

And there’s a lot of measures to unwind after governments piled in like never before to shield economies from the unprecedented second-quarter slump. Almost $11 trillion of fiscal resources has been approved globally since the crisis began, with an extra $5 trillion still in the pipeline, according to the Institute of International Finance.

Analysis by McKinsey & Co. estimates that government deficits worldwide could reach $11 trillion this year and a cumulative total of $30 trillion by 2023, which they say will require an “epic balancing act” if authorities are to successfully contain debt while ensuring their economies grow.

Ongoing Stimulus

For now, finance ministers and their central bank counterparts in major developed economies including the U.S., Japan and Europe continue to pledge more spending to support their economies. A mix of near zero interest rates, unprecedented quantitative easing and well functioning debt markets means they’re able to fund their stimulus with little stress, but that mix may not hold forever.

“The deeper question is how will governments finance future growth without jeopardizing fiscal and financial sustainability,” said Cui Li, head of macro research at CCB International Holdings Ltd. in Hong Kong. “Given the concerns for growth, I think the policy arguments are likely to sway in favor of spending.”

U.S. Programs

In the U.S., Federal Reserve Chair Jerome Powell urged Congress not to pull back too quickly on federal relief for households and small businesses amid increasing debate over whether to extend temporary programs that were put in place to shield them from the pandemic.

Congress is debating whether to extend additional unemployment benefits of $600 a week, a key part of the pandemic stimulus, beyond their current expiry date of July 31. Another program to prop up small business and help them avoid layoffs is coming toward the end of its allotted funding. And lawmakers also face pressure to provide more cash to state and local governments, which start a new fiscal year on July 1 and are being forced to fire workers as their revenue dries up.

Canada, U.K.

Meantime, Canada is seeking to wean millions of people off government support in what’s described as one of the trickiest economic policy maneuvers in the country’s recent history.

The U.K. government bowed to pressure to continue providing free meals for Britain’s poorest children over the summer after a campaign led by England soccer star Marcus Rashford. That comes as the Treasury is funding the wages of more than 11 million jobs, with a price tag some say could exceed 100 billion pounds by the time it expires in October.

It’s a similar story in the euro area. In the region’s four largest economies — Germany, France, Italy and Spain — support programs covered about 34 million jobs at the start of this month.

While some relief measures will fade away as businesses come back on stream, it will be harder to make judgment calls on pulling back on support for the labor market especially, said Fabrizio Pagani, a former adviser to the Prime Minister of Italy.

“Eventually there will be significant job reallocation and possibly unemployment,” he said. “Governments will be reluctant to see that happening.”

What Bloomberg’s Economists Say…

“In the first intensity of lockdown, the priority for governments was clear – pump cash into the economy as quickly as possible. As lockdowns ease, priorities will start to shift. In the next phase, stimulus will be more targeted, with support for worker retraining and business creation coming into the mix.”

–Tom Orlik, chief economist

The withdrawal challenge means some crisis measures rushed out in the past few months will remain in place long after economies start to recover — much as they did after the last great downturn. More than a decade after the global financial crisis, there are still active remnants of Washington’s $700 billion bailout fund, known as the Troubled Asset Relief Program.

“Just as unconventional monetary policies had stayed around for 11 years after the GFC in 2008, expansionary fiscal policies will also likely be around for some time,” said Stephen Jen, who runs hedge fund and advisory firm Eurizon SLJ Capital in London. “Calm bond markets equals higher temptation to spend more.”

— With assistance by Brendan Murray

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