Spain: one of the developed countries with the least fiscal stimulus against the pandemic

Governments have been forced to launch massive fiscal programs to sustain their economies in the face of the devastating impact the pandemic has had on the economic and social fabric. This economic policy measure has resulted in tax deferment, guarantee and direct aid programs in the form of bank transfers.

An aid package amounting to 2 trillion dollars (15 percent of GDP) has been approved in the United States and the European Union has activated rescue and aid programs (in the form of loans and guarantees) such as SURE (Support to mitigate Unemployment Risks in an Emergency) and Next Generation EU, which seeks to provide 750 billion euros aimed at helping the region to recover. Both programs, together with the multiannual financial framework, amount to almost 2.4 trillion euros, roughly 17 percent of the European Union’s GDP.

Not all countries have been able to counteract this economic emergency in the same way, however. Some governments have gone much further in their stimulus policies than others. MAPFRE Economics’ latest Outlook report has compared the fiscal measures implemented by each government, and the differences are considerable. 

Countries such as the US, Canada, Japan and Australia have spent more than 10 percent of their GDP on discretionary spending to offset the effects of COVID on their economy. Brazil, Chile, Germany and the United Kingdom have spent more than 7.5 percent. France, Peru and Sweden, more than 5 percent. Spain, Italy, Argentina and Colombia, more than 2.5 percent. Finally, countries such as Mexico, Russia and India trail behind with less than 2.5 percent of their GDP used in fiscal policies to fight the virus.

The MAPFRE Economics report goes further and breaks down the types of fiscal measures that each country has put in place, listing side by side both discretionary spending and liquidity support. In the case of Spain, the vast majority of the measures activated have concentrated on providing guarantees for liabilities through the ICO (Instituto de Crédito Oficial — the state-owned official credit institute). 

Another element that the Outlook report warns about is the effect that the implemented stimuli will have on long-term fiscal sustainability, with deficits set to reach double digits in 2020 and 2021 while many countries’ public debt will exceed 120 percent of GDP. “The world will live on high levels of debt for a long time, something that was unthinkable just a few years ago.” 

A crisis in two phases

As a result of all of the above, MAPFRE Economics envisages a two-phase development of the crisis caused by the COVID-19 pandemic. Firstly, a containment phase (during the second and third quarters of 2020), with supply shocks affecting global value chains, restrictions on demand—especially for services—and high uncertainty, leading to increases in the savings rate and a fall in consumption.

There would then come a second transition phase (which would extend from the last quarter of 2020 and last throughout 2021), during which the world would enter a second wave of infections, with an increase in the number of coronavirus cases and a consequent return of restrictions, with mixed effects on global activity depending on the corresponding specializations and renewed levels of pessimism among consumers and producers. This would take place in an environment with reduced monetary and fiscal leeway for the application of public policies and thus a lower capacity for positive surprises in the future.

In these circumstances, the experts at MAPFRE Economics conclude that “the future will be dominated by three elements of the new normal: (i) substantially higher levels of debt; (ii) lower long-term economic growth; and (iii) a lower level of participation of the market in favor of the public sector and central banks.”