Can the current policy stance (reduced economic activity, combined with public income support) be sustained in your country, and for how long? What do you see as necessary and useful next steps, in particular to revive economic activities (soon)? How do you see the current and future fiscal viability of the crisis relief measures?

Policy measures in Austria since the start of the pandemic aimed to help businesses survive and to cushion employment losses. However, uncertainty about the future development of the infections lowers demand and global supply chains are disrupted. With the start of autumn, infection numbers have been on the rise, with negative consequences for the recovery. The touristic sector, which had partially compensated the losses of the lockdown period during the summer months (at least outside the cities), was hit severely by travel restrictions on Austrian regions with high infection rates imposed by Germany and other countries. As the increasing concentration of short-time work on manufacturing jobs and some instances of mass-layoffs show, the outlook is dire for parts of the manufacturing industry, too. There is concern that a substantial number of businesses will have to fold towards the end of this year and in early 2021. This will undoubtedly have implications for employment levels.

Policies so far have focused primarily on minimizing job destruction, with little or no measures to foster job creation. As the extensions of the short-time work scheme and of the hardship fund indicate, these policies will continue to play an important role in the coming months. Future policies will however have to focus more strongly on job creation, for instance through government investment and spending on infrastructure such as public transport or the renovation of schools. Substantial efforts will have to be made to address the situation of vulnerable labor market groups and their households, who risk to face long-lasting negative consequences from the pandemic in terms of employment and income perspectives. To this end, close monitoring and scrutiny of socioeconomic indicators will be important, with focus on the development of different dimensions of inequality, including gender gaps.

The fiscal impact of the crisis and of the costs resulting from the crisis response measures is still difficult to gauge, but is certainly going to lead to a record budget deficit. The most recent WIFO forecast predicts that the deficit will reach -9.4% of GDP in 2020 and -4.7% of GDP in 2021. In addition to the initial €38 bn. rescue package, the government implemented a reform of the income tax, which lowered the entry tax rate from 25% to 20%. This reform was applied retroactively to January 2020 with the goal to support household incomes. In addition, the government decided to boost low pensions (up to €1.000), with an increase by 3.5%. This adjustment is well above the inflation rate for the reference period (1.5%). On average, pension incomes will increase by 1.8%. Other measures to support employment, fight the recession, and stimulate aggregate demand are being discussed.

The yields on government bonds rose slightly during the first weeks of the pandemic lockdown, but they declined again thereafter and are currently negative. Against this backdrop, sustainability of the Austrian public debt is currently not a primary concern.

Like many other countries, Canada is now grappling with the second wave of COVID-19. Much of the policy focus therefore remains on the health and well-being of Canadians, with newly introduced restrictions in several jurisdictions.

In terms of fiscal spending, there has been considerable debate of the federal government’s response to date. During the height of the crisis (April through September 2020), monthly federal income support payments averaged $22 billion and an estimated 14% of GDP was spent over the first six months of the pandemic. Regarding fiscal sustainability, the Parliamentary Budget Officer’s (PBO) report of November 6, 2020, suggests “the primary deficit (that is, revenues less program spending) to reach 14.8 percent of GDP in 2020 — the largest on record — and net debt to increase sharply, rising to 48.1 percent of GDP from 30.3 per cent in 2019.”

More recently, the economic statement issued on November 30, 2020 by the federal government projects the federal debt to gross domestic product (GDP) ratio to be 50.7% in fiscal year 2020–21 and 52.6% in 2021–22. For context, Canada’s peak federal non-wartime debt ratio was just over 66% in the mid-1990s, which ushered in an extended period of austerity. By international comparison, in its November 2020 statement the Canadian federal government reported spending a comparable percentage of GDP on direct fiscal support to that spent in Japan and the United States, but more than the United Kingdom, Germany, France and Italy. Canada also reports higher deferred revenue and accelerated spending than all G7 nations except Japan. This contrasts to the mid-summer snapshot, when Canada’s total COVID-19 support – i.e., direct fiscal expenditures, tax and fee deferrals, and credit and liquidity support – was reported to have been similar to that of Germany and Japan as a share of GDP, but more generous than all other G7 nations.

It is important to note that much public debt in Canada is carried by provincial governments, so the federal debt does not reflect total public debt. And while the federal government estimates that 80% of COVID costs have been paid by the federal government, in the PBO fiscal sustainability report of November 6, the PBO indicated that for “provincial-territorial, local and Indigenous governments, current fiscal policy is not sustainable over the long term.”

While the federal debt-to-GDP ratio is set to spike, it is forecast in the near term to remain around 50% of GDP (rather favourable compared to other OECD countries even after provincial debt is added to this federal debt ratio), supported by a low (even declining) debt service ratio (owing to extremely low interest rates). Yet, this outlook is predicated on a number of factors. The first relates to how the pandemic plays out during this second wave, its impact on overall economic activity and whether additional support measures (new programs or extensions of existing ones) are needed. Clearly a combination of the two (lower revenues and higher expenditures) would further deteriorate Canada’s fiscal position. The second risk relates to any noticeable change in debt servicing if interest rates were to climb. While the Bank of Canada is set to keep rates low until 2023, modest increases could have serious implications for Canada’s fiscal position with considerable knock-on effects for aggregate growth and individual welfare.

Canada’s federal government is developing a plan to “build back better,” which may include large-scale, ongoing public spending programs. Indeed, the federal government’s November 2020 economic statement cited above promises $100 billion of recovery spending over the next few years but has not yet provided any details on the nature of that spending. This seems sensible given the uncertainty regarding how the pandemic will unfold. How these proposals will evolve is unclear, as are the potentially substantial increases in healthcare spending both in the medium term to “catch up” from COVID-19 and because of ongoing acute deficiencies, particularly in long-term care homes. This combined with major pre-COVID issues such as population aging and climate change mean that public policy decisions made in the near term will likely have very far-reaching and long-lasting impacts.

  1. This includes Employment Insurance (and related modifications), CERB, CEWS and CRB. See Parliamentary Budget Office, “Economic and Fiscal Outlook: September 2020,” https://www.pbo-dpb.gc.ca/en/blog/news/RP-2021-027-S–economic-fiscal-outlook-september-2020–perspectives-economiques-financieres-septembre-2020.
  2. Including measures related to health, direct support and liquidity support. See details: https://www.canada.ca/en/department-finance/economic-response-plan/fiscal-summary.html.
  3. See https://www.pbo-dpb.gc.ca/web/default/files/Documents/Reports/RP-2021-033-S/RP-2021-033-S_en.pdf.
  4. https://www.canada.ca/en/department-finance/news/2020/11/government-of-canada-releases-supporting-canadians-and-fighting-covid-19-fall-economic-statement-2020.html
  5. For an international comparison including provincial debt see the IMF’s October 2020 Fiscal Monitor, although adjusting the numbers for international comparability also makes them differ from some of those discussed here (https://www.imf.org/en/Publications/FM).
  6. However, on its fiscal sustainability report (ibid.), the PBO indicated that for “provincial-territorial, local and Indigenous governments, current fiscal policy is not sustainable over the long term.”

The current period is marked by a very high degree of uncertainty linked to the resurgence of the epidemic, which has triggered a second containment, admittedly less restrictive than the first at the beginning of November 2020, but which could evolve according to the evolution of the epidemic. This second confinement has led to the vote of a fourth draft amending budget. The public deficit will reach 223 billion euros, or 11.3% of GDP in 2020. The French debt at the end of 2020 is revalued at nearly 120% of GDP (it was 98.4% of GDP in 2019).

After an initial phase of slightly less than two months with a rather strict lockdown, many restrictions had been removed during summer. This approach had followed the general policy strategy of a careful and, depending on the local COVID-19 situation, potentially regionally differentiated revival of economic activities, in combination with close monitoring efforts, continued social distancing and widespread testing. Given increasing infections rates and to avoid overloading the healthcare system in Germany, a national (partial) lockdown has been reinstated in early November.

At the same time, the rather controversial debate about the costs of forgone economic activities and governmental spending to mitigate the immediate effects of containment continues. In this context, it seems advisable to avoid too broadly targeted and too generous governmental subsidies.

In certain constellations additional targeted compensations may be necessary if companies and employees are particularly affected by the specific nature of the current COVID-19 crisis. This includes, for example, the cultural and event industry (and possibly the tourism industry) with an unclear time perspective during which economic restrictions to maintain the applicable hygiene and distance regulations need to be in place. In addition, the situation in “essential” sectors and medical professions with an often greatly increased workload should be closely monitored.

However, sectors and industries that have been significantly affected by the current crisis as well as by long-term structural changes, such as the automotive and retail industries, should be clearly distinguished from these areas. Here, the current COVID-19 crisis acts as a catalyst that unexpectedly accelerates ongoing transformation processes. Although it appears necessary in the short term to cushion the social consequences of these now accelerated processes in a suitable manner – primarily with measures of the welfare state that are already in place – additional measures that aim to preserve existing structures should be avoided.

An open question in the German context concerns the further perspective of short-time workers. In the current crisis, the extension of the period for which short-time work compensations are paid to up to 24 months is generally considered appropriate. However, rising wage replacement rates, which increase with the duration of short-time work, dampen the necessary adjustment reactions to crisis-induced structural change, and declining entry wages during the crisis reinforce this effect. Current data point towards the development of a stock of long-term short-time workers – especially in industrial sectors and in sectors with long-term structural challenges, but also in companies that were already in a rather difficult economic situation before the current crisis. In this way, short-time work compensation granted over a longer period can lead to an excessive stabilization of employment relationships that are no longer sustainable.

Therefore, in a “second phase” of short-time work, it could make sense to combine short-time work more strongly with instruments of active labor market policy. The longer the individual or company short-time work has already been in place, the stronger the combination with elements such as training should be. The core idea is to gradually dissolve the link to the current employer. This should be the case in particular for employees for whom it is increasingly likely that they will not be able to resume their previous employment in their original company after the end of their entitlement period to short-time work compensations.

Finally, the German situation also depends on the ability to stabilize the European and global economy. The German economy relies to a large extent on foreign demand for goods and services, on reliable and efficient global value chains as well as on free labor mobility. However, with regard to the European stabilization efforts, the German position looks more accommodating or showing solidarity than perceived at first glance.

The Italian Government extended social safety nets to support workers and their families. These measures only postponed the effects of COVID-19 on the Italian labor market but as soon as these will be over employment levels will be severely hit; it is essential that the Italian government will be ready and prepared when it happens. As suggested by Lucifora (2020), the Italian government should invest in ALMP that should trace and treat newly unemployed workers. In particular these intervention should sustain the workers who is going to lose a job and facilitate his/her job search process by (i) identifying and (ii) developing skills and qualifications needed by the firms in the labor market.

  1. https://www.lavoce.info/archives/66863/disoccupazione-un-contagio-annunciato/

The most recent economic outlook of CPB (2020c) revealed that the shock to public finances due to the crisis and the special policies will remain bearable in the Netherlands, even in the most severe scenario. The gross government debt increases very sharply in the base scenario though, from 49% of GDP in 2019 to 60% in 2020 and 62% in 2021. Also in the scenario where we have a weaker recovery than in the base scenario and in a scenario with a second contamination wave, gross government debt is expected to remain sustainable, at a debt level of 72% of GDP in 2021.

However, it is now clear that this is not a V-shaped recession, but more likely to be a ‘Nike-swoosh’ or W-shaped recession. This is because at least part of the social distancing policies will remain in effect until a vaccine or cure arrives, and a second wave is gaining momentum in Europe. Hence, a reallocation of workers from firms and sectors that are shrinking to other firms and sectors seems inevitable. Hence, we should protect workers, but at the same time provide sufficient incentives and possibilities for workers to relocate to where they are the most productive. In this process we also have to make sure that there is not an excessive loss of firm- and sector-specific capital in the process of scaling down, and scaling up once the vaccine or cure arrives.

  1. See also Blanchard et al. (2020) and Jongen and Koning (2020).
  2. The projected recession has also fueled the debate about the rather strict employment protection of workers with a permanent contract combined with limited restrictions for the use of ‘flexible’ contracts, where ‘flexible’ workers typically have limited insurance but sometimes special tax deductions (self-employed), which may be one of the reasons why the share of flexible work in the Netherlands is relatively high from an international perspective. This was already high on the agenda following the report of the Committee for the Regulation of Work (Commissie Regulering van Werk) published in January 2020. (https://www.reguleringvanwerk.nl/)

The strict lockdown measures and support from the government are not a long run equilibrium and cannot be sustained for a long period of time. This becomes apparent when we consider that most initiatives have an exceptional and temporary nature.

Overall, government actions tried to sustain the impact of the shock and avoid mass job destruction and firm closures. For the near future, it is important not to let the market adjust their expectations to the disrupted lockdown scenario. Instead, it is important that a majority trusts that “all will be well” and uses this positive expectation to rapidly adjust to a new way of living. If this happens, our recovery may in fact be closer to the “V” shape.

GDP evolution and forecasts

Forecasts by the European Commission (June, 2020) seem to lie on this scenario. The unemployment rate in Portugal is expected to rise by 3.2 percentage points in 2020 (6.5% in 2019 to 9.7% in 2020, and 7.4% in 2021). The projections also suggest that the Portuguese GDP will fall by 6.8% in 2020 (below the EU average of -7.7%), but will recover in 2021 (expected growth of 5.8%). Using data from the Office for National Statistics (INE b, 2020), in Figure 3 we plot the quarterly GDP series (chained volume series, in million Euros, reference year 2016) and date the phases of the cycle. We can identify a sharp decrease in GDP level during the first two quarters of 2020. The future will tell the shape of this business cycle.

In Figure 5 we plot the quarterly homologous variation of GDP. During the first quarter of 2020 Portuguese GDP fell by 2.3% compared to the same quarter in 2019. The second quarter of 2020 was mostly spent under strict lockdown measures and GDP fell by 16.3% compared to the second quarter of 2019. In the third quarter of 2020 measures intended to slow down the spread of the virus were eased and GDP fell by -5.8% compared to the third quarter of 2019 (and increased, chain variation, by 13.2% compared to previous quarter). This improvement was mainly due to internal demand which was driven by the less negative behavior of private consumption (INEc, 2020), exports of goods have also improved during the third quarter and were the main factor that contributed to the reduction of the fall in net external demand.

Key policy macro responses as of November 5

The recent intensification of the virus outbreak has led to progressive reinforcement of social distancing rules and limitations on economic activity. Social distancing measures and the use of masks on public transport are mandatory. The State of Calamity was reactivated throughout mainland Portugal as of October 14, which tightens limitations on gatherings, such as in commercial and catering establishments.

The government has responded to the decline in output and employment with a range of measures to support the economy and jobs, and facilitate progressive resumption of economic activity. Recent key fiscal measures include: i) additional resources for virus-related health and education spending; ii) over €600 million per month (0.3% GDP) in financial support for those in temporari leave by their employer, which has been phased out in favour of financial incentives to support progressive reopening and to normalize business activity (about €1.3 billion equivalent to 0.6% GDP); iii) up to €13 billion (6.8% GDP) of state-guaranteed credit lines for medium, small and micro enterprises in affected sectors, operated mainly through the banking system; and iii) €7.9 billion (3.7% GDP) of tax and social security contribution deferrals for companies and employees. Additional financial support is also provided for the self-employed affected by the virus, the unemployed, people forced to stay home to care for children, the national airline and those sick or in isolation due to the virus. On November 5, the Council of Ministers approved additional measures to support the economy, such as €0.8 bn (0.4% GPD) in grants to micro and small companies, and €0.8 bn in credit line guarantees, and expanded eligibility for affected companies to financial support for progressive recovery.

The Portuguese government has approved a moratorium on bank loan repayments for families and companies affected by the coronavirus outbreak and a recent extension until end-September 2021. The Banco de Portugal (BdP) has relaxed some aspects of its macro prudential measures for consumer credit and postponed the phase-in period of the capital buffers for ‘Other Systemically Important Institutions’. In addition, the BdP has announced a series of measures directed to less significant banks under its supervision, in line with the initiatives undertaken by the ECB and the EBA. These include the possibility to temporary operate below selected capital and liquidity requirements; a recommendation to restrict dividend distributions until January 1, 2021; an extension of deadlines of some reporting obligations; and rescheduling of on-site inspections and the stress test exercise.

Fiscal viability and the European response

Since Portugal was one of the countries involved in the European Sovereign Debt Crisis it is important to also note the projections made for the Public Budget Balance (as a percentage of GDP): -6.5% in 2020 and -1.8% in 2021. The high public debt (118% of the GDP in 2019, 132% in 2020 and 124% in 2021) prevents a more effective public support, not only to keep interest rates below 1%, but also to prevent the transmission to the banking sector, which remains fragile in spite of recent improvements.

According to the IMF projections, Portugal is the fourth country out of 38 advanced economies with a lower immediate budgetary impact due to the measures taken to fight the pandemic and its impact on the economy. The measures taken so far by Portugal represent a deficit of 3.2% of GDP, a number that is well below the average of 7.3% for 38 advanced economies. However combining these forms of support with granting of loans and guarantees, or the postponement of the collection of taxes or social security contributions, the measures adopted in Portugal correspond to a value equivalent to 10.8% of GDP, one of the largest among advanced economies.

Therefore, the state’s financial effort to combat the crisis has been relatively low with regard to measures with an impact on the deficit and only higher in liquidity support measures. This raises questions on what the European response to the economic crisis that followed the outbreak of the COVID-19 disease, and support to member countries, will be. So far, the SURE (Support to mitigate Unemployment Risks in an Emergency) program has been approved by the Council of the EU (which will be running, at least, from June 2020 to December 2022). This program provides loans at favourable rates to the member states to “cover the costs directly related to the creation or extension of national short-time work schemes, and other similar measures they have put in place for the self-employed, as a response to the current crisis” (EC, 2020). It is difficult to foresee the effects of this program in Portugal both in terms of its effectiveness on labour market outcomes (since it is focussed on short-term work and on self-employment) and in terms of the balance of national accounts (since it is a loan).

  1. https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#P
  2. https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/portugal/economic-forecast-portugal_en
  3. https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#P
  • Slovakia could sustain the current policy stance for several more months, although its fiscal space is rather limited. As Slovakia has spent relatively limited amounts on COVID-19 financial aid during the first wave, this remains true as of November 2020. The second wave, which started in Autumn 2020, will however hit the economy hard, when it already has been weakened by the first wave. This will further affect the fiscal capacities of Slovakia.
  • The current policies burden its fiscal position and future generations, which is particularly problematic given that Slovakia has one of the most rapidly aging populations in Europe.
  • The overall situation is evolving rapidly, as Slovakia was vigorously reopening its economy in May and June 2020. After a strong third quarter of 2020, the Slovak economy will inevitably slow down in the fourth quarter, as the second wave has hit it and its main trading partners in Autumn, 2020.
  • As Slovakia has been upgrading its anti-COVID-19 aid package, the hope was that with the reopening the economy it would rebound and the policy measures would not be needed for too long. Although the Summer indeed provided for a strong economic performance, with the second wave that hit Slovakia and its key trading partners in Autumn 2020 the situation has dramatically worsened.
  • A large share of Slovakia’s GDP depends on foreign demand, and hence on the speed of recovery in Slovakia’s main trading partners in Europe and beyond. Coordination at the EU level is therefore essential.
  • As the economy was nearly fully reopened as of June 2020, the key measures that were recommended: 1) preventing the number of cases from increasing, resulting in the need to step back with the reopening; 2) related, testing and tracing vigorously and smartly, isolating active cases, making the health sector more resilient; 3) providing for the adjustment of the economy to the changed economic conditions and opportunities under the new post-COVID-19 normal (e.g. digitalization, greening), including technological advancement and upgrading its position in value chains; 4) fighting poverty, social exclusion and excessive inequality in the labor market and education, ensuring a decent living standard for all; 5) reforming and upgrading its governance and administration.
  • Slovakia is discussing the use of EU Recovery and Resilience Fund, involving its governmental analytical units and about a 100 leading experts.
  • However, as most of Europe, including Slovakia, could not prevent the second wave of COVID in Autumn 2020, the key challenge is the containment of the pandemic with medical and non-medical instruments. Slovakia implemented a mass testing with antibody tests in Autumn 2020, and is discussing strategies of targeted testing to prevent full lock-downs. The key challenge is developing a sustainable strategy of PCR testing, antibody testing, tracing, and social distancing to contain the pandemic until a vaccine or treatment becomes readily available.

As all countries, Spain is facing a simultaneous supply and demand shock caused by the pandemic and the response to it in terms of the lockdown. Due to the higher incidence of the disease, the supply shock is longer and more intense than in other countries. At the same time, the demand shock is also going to be of higher magnitude due to the productive specialization of the Spanish economy, particularly in some regions. For these reasons, the current level of public intervention must be sustained even after the current health crisis is overcome. This creates a clear tension in public finances, although some of the adopted measures such as tax delays, will have no final impact on the budget. In fact, once the confinement measures are relaxed or no longer in force, in most sectors the activity will rebound and this will alleviate the pressure on public expenses, particularly those related to income support policies for workers in non-essential activities. The government has forecasted public deficit to reach 11-12% of GDP and a level of public debt of 117-120% of GDP in 2020. For 2021, GDP is expected to grow between 4% and 7% from previous year while the unemployment rate will remain at higher levels than in 2020. As recently highlighted by the IMF, the impact of the measures adopted on public accounts have been significant, and it will take time to come back to a sustainable path. Probably, some exceptional measures should have to be adopted during the fall/winter in order to keep a more balanced evolution of public finances. Moreover, once the economy is on a sustainable growth path, it will be important to carefully plan structural reforms to support growth, facilitate debt reduction and guarantee pension sustainability.

  1. https://www.imf.org/en/News/Articles/2020/09/29/mcs092920-spain-imf-staff-concluding-statement-of-the-2020-article-iv-mission

There is no doubt that the current economic policy measures are dramatic by any normal standards. The total cost of the current set of (short-run) discretionary measures was estimated to be 240 billion SEK, i.e. 4.8 percent of GDP during the spring. The most expensive measure was the short-time work scheme (95 billion SEK). However, several of the measures have cost much less than anticipated and the current estimate for idiosyncratic measures is 193 billion SEK instead. Spending on short-time work is at the moment at 29 billion SEK and the full year estimate is only 43 billion SEK now.

On top of this, there is of course a substantial additional financial burden incurred from lost tax revenues and payments related to the automatic stabilizers. The most recent figure from the Government’s fall budget for 2020 suggests a total estimated public sector deficit of 268 billion SEK, i.e. 5.5 percent of GDP during 2020.

On the positive side, Sweden benefits from reasonably sound public finances, and in particular, low public debt (35 per- cent of GDP) at the onset of the crisis. Obviously, a low debt rate makes the response more sustainable than otherwise. At the same time, it is unlikely to be sustainable to retain one in every ten worker on a near full payroll without participating in productive work. In the worst case, the very generous subsidy rates in the short-time work scheme may induce firms to postpone the reopening of business activities for too long. In particular, the speed of recovery for “up-stream” firms that supply inputs to other firms may be hampered if their “down-stream” buyers remain in short-time work schemes for too long. This suggests that the most generous subsidy rate (80 percent) which currently will end in July, probably should not be extended.

Tentative conclusions: This report has produced an early assessment of the impact on the Swedish labor market from restrictions related to the Covid-19 outbreak with the aim of making an early assessment of policy measures aimed at mitigating the negative impact on the labor market. Our documentation and assessments are early and partial in nature. We hope to return and update our assessments later on.

In this early report, we make three main observations: First, despite the apparent comparative leniency of the Swedish Covid-19 restrictions, the Swedish labor market was hit very hard initially, and the effects linger on. The impact has been particularly severe in industries where Covid-19 recommendations are most directly relevant, such as hotels, restaurants and retail. Eight weeks after the restrictions were announced, 9 percent of the labor force was covered by the short-time work scheme. The crisis led to a rapid increase in registered unemployment by 1 percent of the labor force and the growth continued to accumulate thereafter. Over time, however, the situation appears to have stabilized but at a higher level of unemployment. Layoff notices increased dramatically early on, but stabilized fairly rapidly. Second, the negative impact has arisen even though economic policy responses have been massive by historical standards. Measures have primarily been aimed at protecting firms and permanent jobs. Our early assessment is that this has been a reasonable objective as it may facilitate a more rapid recovery when the economy rebounds. On the negative side, this focus inevitably leaves marginal workers to be hit very hard by the downturn. Reduced eligibility criteria for unemployment insurance may alleviate some of this impact. Third, despite being expensive, the current policy stance is financially sustainable. But current measures are explicitly short-run in nature, and it is likely that the support for struggling firms may need to be prolonged. Strong public finances ensure that the country can spend and loan for some time, but as current measures are draining the public finances at a rapid pace, they are not sustainable indefinitely.

Perhaps the clearest take-away from our early assessment of the Swedish experience is to caution against overly optimistic assessments of the economic impact of gradual openings from complete lockdowns to Swedish-style “modest” restrictions in other countries. Even though it seems possible, or even plausible, that the labor market impact has been even worse in other countries (we leave explicit cross-country comparisons to the comparative part of this assessment project), it seems fair to conclude that restrictions such as those currently held in Sweden – with Swedish compliance rates – generate a substantial drop in labor demand, in particular within the hotels, restaurants and retail sectors. Thus, if Swedish-style restrictions are perceived as the route forward and the “new normal” as indicated by the WHO, we should expect the European labor markets, at least in segments related to personal services, to suffer greatly for an extended period of time. Recovery hopes may be more reasonable in the manufacturing sector where firms appear more willing to hoard labor at the moment, and where much of the (initial) negative impact appears to have been related to international supply-chain disturbances. These disturbances appear to be mitigated as restrictions are lifted across multiple countries at the same time.

  1. Source: Government press conference on May 14, 2020

In Switzerland the economy has been reopened after the first-wave lock-down in essentially two steps: a first one by May 11, including the retail shopping sector and most restaurants and cafés, and a second one by June 8, where a large part of the touristic infrastructure, cinemas and public transport have been reopened. By June 22, the government has broadly abolished and simplified the Covid-related restrictions. Also, the recommendation to work from home has been discontinued. A remaining restriction was that large gatherings and events (beyond 1,000 people) were still banned until end of August. The preventive rules have been generalized and simplified: all the public places are required to implement a protection concept, social distancing and hand hygiene have to be maintained and registering (or tracking) a/o the wearing of face masks should be imposed where sufficient distance is not possible. In view of the steep increase of the infection rates in the second wave, the Swiss government has tightened the rules by end of October – like more systematic wearing of masks in public realms, no gatherings above 15 people and events above 50 people, recommendation to work from home – but did not go for a second national lock-down. However, unlike in the first wave, a lot of regulatory competence has been handed back to the Cantons, which resulted in a heterogeneous picture. Cantons which were more heavily hit so far in the second wave additionally strengthened the measures, up to temporary local lock-downs. Over the next months, a continuation of such Canton-specific policies is expected, with dynamic tightening and weakening of the restrictions following the levels of infection exposure.

As for fiscal viability: Switzerland is in a comparably good position to sustain financial support of the participants of the economy for a relatively long time. The state has passed a decade of steady debt reduction, and the current debt rate is lower than in most other European countries. However, the additional spending of CHF 36 billion (whereby 4.7 billion will go onto the accounts for 2021) on Covid-related measures as well as of CHF 42 billion on loan guarantees and loans for “hardship support” measures [EFV] will essentially undo the whole debt reduction achieved over about the last decade. Moreover, projections by KOF-ETH [2020a] predict that the state will face a reduction of tax income at all levels (confederation, cantons, municipalities) of more than CHF 5.5 billion this year. Next year this reduction will expectedly more than double, due to the current measure of deferred invoicing of taxes. For the social insurances it is predicted that they will earn about CHF 1 billion less in contributions this year. KOF-ETH expects deficits – accumulated across all three tax levels and social insurance – of CHF 18.2 billion (=2.6% of the GDP) this year, CHF 12.2 billion (1.7% GDP) in 2021 and CHF 2.4 billion (0.3% GDP) in 2022. With this, the total level of debt will rise to about 30% of the GDP in 2021. Projections predict that the average rate of registered unemployment reaches 3.2% for 2020 and will increase to 3.6% (5.5% by ILO definition) for 2021. It is predicted that the (seasonally adjusted) unemployment rate will peak in the second quarter of 2021. [KOF-ETH 2020c] The prediction of the rise in the unemployment rate has been substantially reduced since May; at that time, it amounted to 4.3% (6.0%) for 2021 [KOF-ETH 2020a]. In a historic comparison, the currently predicted unemployment rates are high for Switzerland. The peak rate in this crisis could reach similar levels than in the financial crisis 2009/10. In case predictions will worsen again due to a prolonged crisis, the peak could also reach a level above 2009/10.

To sustain the financial stability notably of the social insurance system, political decisions on additional support will be required next year. Most of the initial emergency ordinances introduced by the Swiss government have run out by end of August. Following up, government and parliament transferred most of the measures onto a real legal basis (covid-19 law) and have been working continuously on updating the related ordinances since then. SECO [2020c] estimates that the unemployment insurance (UI) fund will accumulate debts of about CHF 16 billion by end of 2020, predominantly because of the short-time work (STW) scheme. So far, government and parliament have approved extraordinary injections into the UI fund of CHF 20.2 billion in total (see more on this in section “Orientation and targeting of adopted measures”). Through this act it could be avoided that the UI contributions which employers and employees pay on the wage bill need to be increased. This is an important help to keep labor cost low. However, depending on the continuation of the crisis, it is possible that this extraordinary injection was not yet sufficient. Thus, the parliament could be confronted with a further request in 2021. Given the substantial success of STW so far in avoiding higher unemployment levels, it is very well conceivable that a further injection would be politically approved.

In addition to the financial challenges for UI and STW, the Income Compensation Act (EO) scheme will require additional funding as well in the medium run. Which amounts of the loan and guarantee schemes will finally be claimed, defaulted or possibly turned into cash grants is hard to predict. However, to support the survival and avoid larger debt problems for small SMEs and self-employed, it may be necessary as one next step to indeed turn some loan guarantees into cash grants for such targeted groups of small businesses in need (subject to a sustainable business plan). A first move into this direction was visible in the autumn months which saw the introduction of some direct help schemes for heavily affected industries, notably as well the “hardship support measures” (see section “Orientation and targeting of adopted measures”). Parts of this direct help is already designed as “à-fonds-perdu” (non-repayable) contributions.

All these additional funding challenges seem viable, due to the mentioned good condition of the public finance in Switzerland. The Swiss confederation has implemented a “debt brake” since the nineties. However, the case of exceptional crises has been included in the regulation of the debt brake, allowing for exceptions to the usual speed of debt repayment. Moreover, the Swiss government bonds and central bank operate with negative interest rates – thus, at the current state, increasing debt even pays off. Still, I expect – and it is already the case – that the political debates on approving future spending plans will become tougher.

Possible next steps to reanimate the economic activity and the labor market would be to intensify and readjust the active labor market policies (ALMPs). ‘Corona-proof’ versions of active job seeker support need to be developed and implemented. The ALMP programs should be adjusted and more focused to support skill acquisition and job finding in areas that are still relatively highly demanded, with good expectations after the crisis.

In a slightly longer run, as soon as patterns of possible structural changes become visible, it may be advisable to set up targeted investment programs in further education and start-up subsidies. The goal could be to support occupational switches towards sectors that develop favorably after the crisis and to support job creation in such areas. I would advise rather against using tax reductions (e.g., VAT) for heavily affected industries like gastronomy and tourism. This would in tendency only support structural problems (of over-supply) in these industries, and it is moreover an inefficient measure which cannot be targeted. If additional support is required in these areas, then specific investments in useful touristic infrastructure and in promising start-ups would be more advisable. More generally, beyond the short-run survival support, it seems more promising to invest in targeted programs that specifically support some risk groups – like young unemployed or employers and employees in structurally weak industries – in their skill acquisition and transition towards more ‘future-proof’ jobs and business models.

According to OBR, the latest estimate of the aggregate cost of the COVID response support packages is approximately -199.5 billion pounds, 9.6% of GDP. The current policy stance is likely to be unsustainable if unchanged until the end of the year (potentially even earlier). Future fiscal viability is dependent on the speed of recovery of the UK and World economy and the “tolerance” by the international financial markets towards the sovereign debt level. If the tolerance shown is the same as the one display in the European crisis of started in 2008, then most likely it will not be sustainable and can bring pressure of restrictive fiscal policies in the medium-term with severe consequences for inequality in the long-run. Additionally, the UK is no longer part of the EU making the mutualization of debt via mechanisms such as the so-called “coronabonds” is not an option. A mitigating factor is a likely sustained reduction in the capital financing costs due to a fall in investment demand. On October 5, the UK Chancellor Rishi Sunak reiterated that the fiscal sustainability is part of the agenda of the government warning the “hard choices” regarding public finances are likely to come soon as to balance the sharp rise in borrowing and debt levels since the beginning of the crisis.

The next steps to revive economic activity without significant job destruction and high long-term unemployment need to be focused on an efficient and well-monitored phasing out of the job retention schemes coupled with a sustained policy of investment in human capital and reskilling. As employers start to bear more of the costs there would seem to be two groups to carefully consider. The first will return to work, possibly first on a part-time or short time work basis. The second will not, either being laid off because there is not demand for their job, or because their employer closes down. For this group, policy is vital to ensure they do not be placed on a trajectory heading towards long-term unemployment, the economic, psychological and social costs of which are substantial as we know from a large body of research from earlier downturns that featured high levels of long term unemployment (Machin and Manning, 1999). It is important, for individuals, families and society that we do not return to the kind of long-term unemployment picture that did such damage in the UK in the early 1980s.

The pandemic outbreak occurred during a contentious presidential election year. In the highly charged partisan atmosphere preceding the fall election, Congress was unable to agree on a stimulus and coronavirus aid package to replace the CARES Act passed in March, whose provisions have largely expired or are set to expire at year’s end. Legislation must be approved by both the U.S. House of Representatives and the Senate. The House, controlled by the Democrats, most recently passed a $2.2 trillion bill that, among other things, renewed generous federal supplemental unemployment insurance benefits and the Paycheck Protection Program, which extends forgivable loans to small businesses and non-profits. The Senate, controlled by Republicans, most recently introduced a much narrower measure that also would have renewed the Paycheck Protection Program and provided a federal supplemental unemployment benefit (albeit at half the prior level) but was estimated to cost $500 to $700 billion.

A major difference between the House and Senate versions concerned federal aid to state and local governments, set at nearly $1 trillion in the House bill but absent from the Senate version. Like unemployment insurance, the budgetary problems faced by states has become a salient policy issue. While the federal government can run budget deficits, states must balance their budgets each year. High unemployment and a reduction in business revenues are leading to large state budget shortfalls. States will need to make deep cuts to services, which will have adverse spillover effects on the economy. The federal government aid to states thus far has been limited to expenditures on Covid-19 issues.

The economy appeared to be rapidly recovering during the summer, and the disagreement between Republicans and Democrats partially reflected a differing perspective on the need for further stimulus. Many Republicans were more concerned about incurring a large federal deficit than about a weak economy. With the virus’s resurgence in the fall, bringing record infections and deaths and new state-led measures to curtail certain business activities, a second slowdown seems certain.

A new relief package, however, is unlikely to be passed before the Biden administration takes office in January. The shape of any package will depend not only on the state of the economy early next year but also on the outcome of runoff elections for the U.S. Senate in the state of Georgia. These runoff elections will determine whether the Republican party retains control of the Senate or whether the Democrats will have a majority, giving them control of both legislatures and paving the way to a more generous relief and economic stimulus package.

  1. https://appropriations.house.gov/sites/democrats.appropriations.house.gov/files/Updated Heroes Act One Pager_0.pdf
  2. https://www.bloomberg.com/news/articles/2020-09-08/mcconnell-aims-for-vote-on-senate-republican-stimulus-this-week
  3. https://www.upjohn.org/research-highlights/automatic-stabilizers-and-federal-aid-states