Coronavirus: stimulus policies in other countries after the first shutdown

Coronavirus and the resulting government mandated shutdown had a rapid and devastating impact on economies throughout the world.

As governments started to ease public health restrictions after the initial spring lockdown, many countries – especially in Europe – implemented new policies to try to encourage spending. These sorts of policies are known as ‘fiscal stimulus’ policies, as they aim to stimulate spending and the flow of money in the economy, boosting demand for goods and services which results in growing economic output.

This piece was last fully updated in mid-July, so may not cover all the stimulus packages announced over the summer.

What sorts of stimulus policies can governments adopt?

Fiscal stimulus can include some combination of tax cuts, increases in direct government spending, cash incentives to spend provided to individuals or businesses, or interventions to encourage businesses to hire workers. These sorts of fiscal stimulus policies are often accompanied by monetary stimulus policies from central banks, such as interest rate cuts and quantitative easing (which entails the central bank injecting new money into financial markets). Some fiscal stimulus policies may be aimed at boosting not only short-term spending in the economy but also the long-term productive potential of the economy – such as extra public spending on infrastructure or on training programmes.

Stimulus policies are generally thought to be more successful if they are timely (boosting spending quickly), targeted (achieving a large increase in spending in the short-term at minimal cost to the public purse) and temporary (the government can withdraw the policy once the economic recovery is secure). After the 2008 financial crisis, the Labour government under Gordon Brown tried to stimulate the UK economy in several ways, including:

• temporarily cutting the rate of value added tax (VAT)
• creating a car scrappage scheme to incentivise people to buy new vehicles
• subsidising some employers to hire unemployed young people through the Future Jobs Fund
• increasing government investment spending.

Which countries have announced stimulus packages post-Covid 19?

The stimulus packages deployed by governments over the summer varied in size and timing. Germany’s coalition government announced a €130bn (£120bn or 4% of 2019 GDP) package on June 4. New Zealand’s May budget provided around NZ$50bn (£26bn, 17% of 2019 GDP) in extra spending.^[1] Japan and China both announced stimulus packages in late May – Japan’s worth ¥117trn (£870bn, 20% of GDP), the Chinese package around CN¥3.6trn (£410bn, 4% of GDP).^[2]

Other countries, including France, Australia and Canada, took a more iterative approach over the summer, announcing individual stimulus measures but no full stimulus package before mid-July.

What sort of measures have been announced to encourage consumer spending?

Tax cuts

Cutting taxes on consumption (like VAT) is a way to stimulate spending, since doing so should reduce the prices that people have to pay for goods or services. Temporary VAT cuts are a more effective way of boosting spending than permanent tax cuts, because they give people an incentive to spend now before prices rise again in future.

Some governments chose to introduce VAT cuts only for specific goods or sectors, while others cut VAT across the board.

In May, the German government announced that the VAT rate for the restaurant sector would be cut from 19% to 7% for a year from July to encourage people to eat out again once restaurants re-opened. Subsequently it also announced an across-the-board VAT cut, with the main rate falling from 19% to 16% and the reduced rate from 7% to 5%, taking effect on 1 July. These lower VAT rates expired at the end of 2020.

Norway also cut the VAT rate that applies to badly affected sectors like cinemas, accommodation and public transport from 12% to 6%. This was initially until the end of October but has been extended until June 2021.

Subsidies for specific goods and services

Rather than cutting taxes, an alternative approach to supporting spending on specific goods and services is to introduce or increase subsidies for purchasing those items. A government might be especially likely to use these incentives to encourage spending that contributes towards other strategic aims, like carbon neutrality.

This is an approach taken in Germany and France, where subsidies are available for those buying electric vehicles but not petrol or diesel vehicles. The French government increased the subsidy for a new electric vehicle worth under €45,000 from €6,000 to €7,000 and doubled the additional payment for those who swap older vehicles for electric ones. Germany has increased the subsidy for each new electric vehicle purchased from €3,000 to €6,000.

Other countries have targeted help at sectors that are particularly struggling – for instance, the Japanese government offered tourists discounts at local shops and restaurants, while the Australian government created housebuilding and renovation subsidies of A$25,000 (£14,000) per home to support the construction industry.

Cash incentives/direct stimulus

Many countries responded to the Covid crisis by making lump sum payments to those on lower incomes. These payments have two aims: to help those who have lost income due to the crisis and to stimulate spending.

In mid-April the US government gave US$1,200 (£960) to each adult who earned less than US$75,000 (£60,000) a year plus a further US$500 (£400) per child in families where parents’ combined income was less than US$150,000 (£120,000). Australia and France have distributed extra payments to families who are receiving benefits, while Germany’s stimulus package included a one-off €300 (£270) per child payment for every family. Targeting payments at lower income families is likely to be a more effective way of boosting spending as lower income families are more likely to spend – rather than save – any extra money.

What measures have been announced to help workers retain their jobs or retrain for new jobs?

Wage subsidy policies can act as a stimulus as they help maintain incomes and jobs, giving people more money to spend. The UK government’s wage subsidy policy – the Coronavirus Job Retention Scheme (CJRS) – is modelled on a programme that was first adopted in Germany (in the early 1990s) known as Kurzarbeit – or shorter work time. Several other countries across Europe have also provided similar wage subsidies to firms. The UK government has extended the CJRS until the end of April 2021, and many other countries have extended their schemes too, albeit often with changes to eligibility or generosity.

Other governments have adopted other approaches to supporting workers and minimising long-term unemployment as they ease coronavirus restrictions. For example, some governments have introduced programmes to help the unemployed retrain (as in New Zealand) or find jobs in green industries (as in Sweden).

What measures have been announced to encourage businesses to hire and invest?

Tax cuts have been used to incentivise companies to hire more staff or invest and thus increase economic activity. For example, Germany’s June stimulus package included a guarantee that social security contributions will not exceed 40% of wages until the end of 2021, helping businesses to hire more cheaply and with more certainty.

Tax incentives have also been used to increase businesses’ investment spending – for example, increasing the size of tax-deductible allowances for investment or research and development. The German government announced such a measure, increasing ‘depreciation allowances’ for 2020 and 2021 with the aim of boosting investment^.[3]

What public infrastructure spending has been announced?

Another way to put more money into the economy is to increase public spending on infrastructure – for example, investing in broadband, transport or public housing. This stimulates the economy in the short-term by using up otherwise under-utilised capacity in these industries. Such measures can provide a productivity boost in the long term – for instance, by ensuring workers can spend less time travelling or can work more efficiently using better internet. Boris Johnson’s speech on 30 June setting out a ‘New Deal’ for Britain and announcing an initial £5bn extra infrastructure spending signalled that the UK government’s response would include a focus on infrastructure.

This approach has also been taken by some other countries. China’s recovery plan includes large swathes of infrastructure investment, primarily digital or housing projects such as 5G investment and upgrades in public housing, but also a CN¥100bn (£11bn, 0.1% of GDP) fund for national railways. New Zealand allocated an extra NZ$3bn (£1.6bn, or 1% of GDP) for jobs-heavy infrastructure projects, including the construction of 8,000 new public housing units.

Canada created a special fund allocating government funding on condition that infrastructure projects are completed by the end of 2021. This is an attempt to address one of the key problems with using infrastructure as a stimulus – that projects take too long to get off the ground and do not create jobs or help businesses fast enough to contribute to the recovery.