Fiscal Response to Coronavirus and New Debt Normal

Worldwide lockdown measures in response to coronavirus have disrupted economic activity resulting in millions of job losses and bankruptcies. To soften the effects of the economic downturn, governments have announced and are implementing a variety of fiscal measures.

• Fiscal stimulus, whether in the form of additional government expenditures or deferral of certain payments (like taxes and social security contributions), immediately increases countries' budget deficits and are financed through a buildup of public debt.
• Other measures like government guarantees, liquidity assistance, and credit lines might not weaken the budget balance immediately but create contingent liabilities which might turn into actual expenses either in 2020 or later.

COVID-19 fiscal measures may in some cases threaten the economic recovery of some of the hardest hit countries while also resetting what's considered 'normal' public debt burdens and the resulting assessments of economic and investment risk.

• Germany and Italy have provided the largest fiscal support to households and businesses among European countries, with the total stimulus estimated at 21% and 17% of GDP, respectively. Accounting for government guarantees and other liquidity assistance, the figures jump to almost 50% of GDP. 
• Adding in Italy's latests measures, its debt may reach more than 180% of GDP.  Given that Italy is one of the nations worst hit by the global coronavirus pandemic, the increased debt burden will significantly hinder economic recovery.
• According to estimates from Bruegel, a European economic think tank, in the United States and the largest European economies, fiscal responses that immediately increased public debt varies from 4% to almost 20% of 2019 GDP.  If these fiscal stimulus measures transform into government debt, the world's largest economies are poised to move into a new normal for public debt in excess of 100% of GDP leading to many years of austerity in fiscal policy.