Feeding the people, not the sharks: supporting citizens through the pandemic
Around the world, finance departments have found different ways of protecting workers and businesses during the COVID crisis. At GGF’s Finance Summit, senior leaders discussed which worked best – reaching those in need, while minimising waste and fraud. Adam Branson reports
Responding to the pandemic, finance departments have poured billions into protecting jobs, replacing people’s livelihoods and supporting hard-hit businesses: whole economies have been put into induced comas. But even while officials work to avert immediate threats, it’s important that they occasionally lift their eyes to the horizon. And at GGF’s Finance Summit – a rare opportunity for top finance leaders to compare notes and reflect on the pandemic – Latvian official Līga Kļaviņa asked if her colleagues around the world could get one more plate spinning – building policies and support services that foster positive changes in their wider economies.
The crisis, said Kļaviņa – who is Deputy State Secretary for Financial Policy at Latvia’s Ministry of Finance – may be unwelcome, but it provides an opportunity to address structural problems within national economies. “COVID-19, of course, has caused human suffering and economic disruption on an unprecedented scale, and it really seems that our economies and societies after COVID-19 will be different,” she said. “At this moment, working in a ministry of finance, working on fiscal policy, we have to make critical choices about the type of economies that we want to rebuild and how to change the way the economic structure works.”
However, Kļaviņa added that the initial priority must be to support citizens through the first wave of the virus: her government has spent 11.1% of GDP on protecting people’s jobs and incomes. “The main measures were to support economic activity and employment,” she explained. “I would like to stress that these were temporary support measures and there was not any intention to boost, for example, green transition or digitalisation.”
Support the grey economy, not the black one
As Latvia’s Ministry of Finance built those support measures, Kļaviņa recalled, it had to work out how to support those who hadn’t previously been part of the mainstream economy. This topic had generated a great deal of debate, she added: what responsibility did governments have towards people who hadn’t been paying into the system?
“We have in the medium-term budget a proposal to introduce a minimal social security contribution,” she commented – creating a system under which people’s benefits are linked to their tax contributions. Meanwhile, the government has created systems that can support people with all kinds of employment backgrounds.
Michael Froman, a former US Trade Representative now working as Vice Chairman and President for Strategic Growth at knowledge partner Mastercard, recognised the challenge; but he also saw an opportunity to bring people into the mainstream economy permanently.
“You’re absolutely right that we’re seeing a lot of firms that had managed to stay invisible for years now coming out of the shadows and wanting to be part of the formal economy,” said Froman. “That’s a good thing; something to be encouraged. Frankly, I think creating incentives for that would broaden your tax base and get rid of a lot of informality. I certainly wouldn’t punish it.”
Such issues highlighted the difficulty of spending large amounts of money quickly, while minimising the amount that ends up in the wrong places. Dr Harry Tsavdaris, Worldwide Community Lead for Tax and Revenue at knowledge partner Microsoft, noted the risk of fraud in hastily-launched income support schemes. “When you are throwing money from the helicopter – because that is essentially what we are doing – there is a lot of fraud,” he said. “I don’t know if this will continue in the second wave, but I think at a certain point in time, the fraud systems should be put in place and operate.”
Looking to the horizon
Meanwhile, countries are thinking about how best to support economic recovery in the longer term. “The second wave is starting and we still have those emergency measures in force, but in parallel we need to start with the long-term plan with good analysis and discussion at the political level,” said Kļaviņa. “It is a big challenge to identify the right priorities and encourage structural change.”
Froman agreed that the current situation, though highly challenging, presents an opportunity. “Nobody wanted this crisis,” he said. “But now that we’re in it, the opportunity to rebuild better out of it – whether that’s greener or more inclusive – is really front and centre in many governments’ minds.”
On that front, Kļaviņa welcomed the EU’s recovery fund, launched earlier this year, which will provide €600bn (US$715bn) of loans and grants in financial support to business. Critically, a minimum level of 37% of expenditure will be dedicated to green transition, and 20% to digital. “It is a very good opportunity for countries,” she said. “For the first time the EU will borrow substantial amounts of financing in the markets to boost the economy.”
On timing and funding
However, with the second wave of the virus rolling across Europe, Markus Sovala, Director General and Economic Policy Coordinator at Finland’s Ministry of Finance, cautioned that the timing of EU investment will be important. “Many things that are now taking place – like this huge European package – are things that were decided when there was a general view that the epidemic would be soon over,” he said.
“The Finnish government is talking about green growth, but it will depend on how the situation will look early next year,” he added. If the second wave persists into 2021, then “it might be that everything that is being lined up is too early. I hope I’m wrong, but the figures look quite bad in most European countries.”
With pretty much every country on the planet borrowing at unprecedented levels to fund both resilience and recovery programmes, the question was raised as to how long the financial markets will remain comfortable with fast-rising national debts. Froman was remarkably sanguine about the situation. “Provided that the money is invested well in infrastructure and things that will help lead the economy back to a higher growth path, my guess is that the markets will be quite forgiving,” he said.
However, he warned that lenders won’t treat all countries equally. “If you’re Argentina, I don’t know how much room you have for borrowing a whole lot more,” he said. “Mexico is being very conservative, whereas Brazil is being quite open [when it comes to borrowing]. It will be interesting to see how the two fare.”
Armin Steinbach, Head of the Fiscal Policy Division at the Ministry of Finance in Germany – a country known for its fiscal conservatism – was less optimistic. “All countries are now running huge fiscal stimuluses, which are necessary – but what happens next?” he asked. “All fiscal debt ratios will rise, and our concern is that they will rise to a level that is much less sustainable, and might bring us to more exposure to financial market reactions that are harmful to some countries.”
Finding new opportunities
To restore economic growth, countries must understand and explain how COVID’s economic impacts – from short-term lockdowns to long-term changes in consumer behaviour – will affect different industries. And in Froman’s view, many countries are being being both practical and innovative about what can be achieved here. “It may seem odd to talk about tourism at the moment, but a number of governments are working to promote domestic tourism – Argentina is subsidising spending, for instance,” he said.
“But they are also working to prepare the industry as we emerge from this crisis. What corridors are most important? What do tourists spend the most on? How can you go as digital as possible? We’re working with the Singapore Tourist Board, for example, to provide contactless ticketing to make it easier to go from airport to transport to hotel to sites all in a contactless, safe and secure way.”
Jennifer Duncan, Mastercard’s Vice President for Government Innovation, noted that countries are finding ways to combine immediate assistance with long-term productivity improvements. Some schemes, for example, offer both emergency support and retraining programmes – giving workers the skills to find new work in growth sectors.
“So it’s one disbursement initially to allow the citizen who has become unemployed to support themselves in the short term; but the second one is more targeted, and is around training,” she said. “It’s another way of supporting people to recover, while boosting the economy and creating jobs.”
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