The Bank of England described the coronavirus pandemic as a “economic emergency” this week before cutting interest rates to a record low of 0.1% and launching a £200bn QE programme. It joins governments around the world in expanding economic stimulus packages through new quantitative easing measures, increased liquidity to banks, guaranteed loans and, in numerous countries, direct payments to households.
Already this week, the US Federal Reserve has cut rates by 150bps to near zero and has relaunched quantitative easing programme. The Bank of Japan has announced that it is going to double its equity purchases - it already owns about 5% of the Japanese stock market. And the ECB this week used more "do what it takes" language and launched a €750bn euro emergency QE programme to be conducted over the rest of this year.
More targeted fiscal measures within the UK announced this week by Chancellor Rishi Sunak included a £330bn package of loan guarantees alongside £20bn of spending pledges and tax cuts aimed at businesses. Nevertheless, there have been concerns about how much of the aid is being targeted at companies and not directly at employees or households - aside from three-month mortgage payment holidays and more generous sick pay terms. The worry is that while businesses will be able to access loans to stay solvent, there is no obligation to keep the same number of employees, and those who lose their jobs may not have enough money to cover their outgoings.
As a result, the government is expected to announce a wide-ranging package of tax cuts and wage subsidies after Boris Johnson pledged to “stand by the workers of this country.” Chancellor Rishi Sunak had already promised “significant, direct fiscal action” within days to support jobs and incomes.
Sunak said he would work with trade unions and business organisations to “develop new forms of employment support”, taking inspiration from other countries to find ways to help businesses meet wage bills without having to make people redundant. That suggests he is looking at schemes such as one in Denmark where the state will cover 75% of wage costs for companies suffering a drop in demand — or Germany’s Kurzarbeit scheme, which gives state support to companies in return for putting workers on shorter hours rather than making them redundant. It has been suggested that self-employed workers could be given cash based on their previous year’s earnings.
Charlie Bean, at the Office of Budget Responsibility (OBR), said that the government could replace any lost income for the economy with borrowed money to minimise the damage before a recovery. “Let’s suppose the hit to gross domestic product is something like 5%,” he said on Tuesday. “That’s what [the virus] has taken out, so that’s what you have to put back in.” The US announced this week that it wants to send direct cash payments to American households in a package thought to be worth more than $1trillion. US Treasury Secretary Steven Mnuchin said it would be one of the largest emergency fiscal packages ever created, and also let slip that he feared that employment could spike to 20%, from its current level of 3.5%, if the government failed to act.
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