Curing the impact of Covid-19 on the economies.
Who will pick up the cost?
by Marios Kalochoritis
Our generation has been marked by the Covid-19 virus and its memories will linger with us for ever. Even though the infection and mortality rates are extremely high and the cost of human life substantial, we are still better off than originally thought.
The most alarming impact, is the unpresented global reaction and loosely coordinated closing of borders, forcing a shock to economic activity and employment. Air traffic and connectivity between countries went back to what it used to be 70 years ago. Never before have we seen such a halt to human activity, so as to see a positive impact on our environment!
Another stalk realization brought to the surface, was the poor infrastructure and insufficient healthcare in most developed capitals that exacerbated the risks of the virus.
Most governments faced with a shock, resolved to a widespread handout of benefits, grants and support, trying to execute the famous “helicopter money” strategy. Estimates put the government interventions of several countries at around 10% of their GDP mark. A swift and generous approach indeed to support both the needy lower economic strata of the economy as well as key industries.
So far so good.
But all these efforts have a price. With the GDP dropping because of the collapsing activity and hit supply chains, global Debt to GDP is mounting. The latest IMF projections put the global GDP growth in 2020 at -4.9%, a rate that makes the Covid-19 crisis the worst economic downturn since the Great Depression and far worse than the Global Financial Crisis. Global public Debt is estimated to skyrocket to more than 100% of GDP as a result. These numbers could get worse if we have a difficult winter ahead of us.
And while there is a broader acceptance that higher Debt/GDP is sustainable and politically acceptable, the mounting debt will have to be addressed at some point in time. Even though we all expect and hope for a quick return to normality and a stable and progressive restart of our economies, there is a high probability that growth alone cannot address and repay this escalating debt. And it raises the question, how can governments raise additional income.
Wounded economies and higher unemployment will limit the choices of leaders concerned about re-election. Therefore, a more targeted and precise taxation, in the name of social equality, will be on the cards. Taxing those who have more than others, via an imposition of wealth tax, consumption tax (VAT and sales tax), property and inheritance tax, will be shortlisted as possible solutions. Solutions that bring a wider social acceptance and are being resisted only by the wealthy. Solutions that we have historically seen been preferred over others in war-like situations as with the current pandemic.
As we move away from the shock of Covid-19, Corporates, Entrepreneurs and wealthy individuals alike, must take the time and review their fiscal and tax arrangements and prepare for what is inevitably coming in the next couple of years. A higher taxation and an increased targeting of the wealthy.
We at Loggerhead Partners, have conversations with our clients all the time about their fiscal planning and try to set up agile structures so that our clients have the ability to manoeuvre as politics, taxation and the macro economic environment change. Contact us to schedule some time to talk.