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COVID-19: The Economic Policy Response

Ethan Ilzetzki[1]

Wednesday, March 25, 2020


[1] The author acknowledges Dhruv Narayanan for his able editorial assistance.


The COVID-19 virus has claimed tens of thousands of lives worldwide and is still spreading rapidly. The fallout of social distancing and lockdowns is already tangible with the world economy heading towards negative growth. The CfM’s panel of experts supports a broad portfolio of policy responses and a “whatever it takes approach” to minimize the economic damage. A large majority of panellists advocate credit and transfers in support of business survival. Many panellists supported making unemployment payments more generous and streamlined. The panel was unanimous that public debt concerns should be put to the side until the crisis is resolved.


The March 2020 CFM survey surveyed its panel of top UK economists on policy options to respond to the COVID-19 economic crisis. Respondents were first asked for their (two) most preferred policies. They were then asked to state the highest level of public debt they would be comfortable with if funds were used effectively to support the economy. 

The COVID-19 Economic Crisis

The COVID-19 pandemic and its economic fallout hardly require an introduction. To date, it is estimated that COVID-19—also known as the coronavirus—has infected nearly half a million people worldwide and claimed nearly 20,000 lives (see the Financial Times’ graphical coverage for updates). The virus is still spreading at an exponential rate and has a death rate of around 1%, so the eventual global death toll is certain to multiply by orders of magnitude this year. Countries have taken a variety of measures to contain the spread of the virus, including full lockdowns; partial lockdowns; and testing, contact tracing and case isolation.

The economic damage is already tangible with China’s manufacturing index and fixed investment both declining by 30% so far this year relative to December 2019. European manufacturing indices fell by similar amounts in March. Stock markets have plummeted with the FTSE 100 index losing close to a third of its value in the past month. The European Central Bank (ECB) predicts that Eurozone GDP could decline by as much as 4% this year. With large sectors of the global economy entirely shuttered this spring, this may prove optimistic. Unemployment claims in the US are predicted to be greater than a million this week alone. The policy responses have been rapid in all major economies, with governments providing both monetary and fiscal support to the economy.

A number of policy proposals have been suggested and rolled out. A number of economists have proposed direct cash transfers (see Jason Furman’s VoxEU chapter).  Early reporting suggests that a transfer of this sort will be part of the Trump administration’s fiscal package. The Trump administration has also expressed interest in including a payroll tax cut. Others have proposed aid to firms affected by social distancing and lockdown policies. These include direct transfers (e.g. Saez and Zucman) and low-interest credit to businesses. The UK Treasury’s £350 billion fiscal package announced this week included both types of support (£330 billion in credit and £20 billion in direct support). The German government has also put in place a fiscal package including more flexible unemployment insurance (Kurzarbeitergeld) and cheap credit for businesses. Finally, the Federal Reserve, ECB, and Bank of England all announced unlimited quantitative easing including purchases of government bonds, commercial paper, and mortgage-backed securities in the US case. VoxEU’s ebook on the COVID economic crisis details these and other policy options.

Related to this debate, the first two questions in the latest CFM survey asked panellists for policies that would best dampen the immediate impact of the economic crisis. They were asked to put aside the obvious need to respond to the health crisis itself and focus on the economic fallout from social distancing measures enacted. This also contrasts with policies that might be useful as lockdowns are removed and health concerns subside.

Question 1: Which of the following would have the greatest impact in mitigating the economic effects of the coronavirus economic crisis?


Question 2: Which of the following would have the second greatest impact in mitigating the economic effects of the coronavirus economic crisis in the UK?














Twenty-nine panellists responded to these questions. Responses were varied and many participants argued that numerous tools should be employed. Support for businesses—along the lines of the measures proposed by the Chancellor last week—drew large support. More than three quarters of respondents mentioned either credit support or direct transfers to firms, or both, among their two preferred policy tools. Respondents supporting credit rather than transfers argued that the former would incur lower fiscal costs. Sir Charles Bean and Ricardo Reis, both of the London School of Economics (LSE), concur on the need to avoid permanent damage to the supply side of the economy. Sir Bean, this would mean “the government acting as an ‘insurer of last resort’” in a manner which “encourages firms to continue to retain and pay their workers (possibly at a reduced rate) during the period of disruption.” He also noted that loans, as opposed to transfers, “minimise the cost to the exchequer,” whilst Reis links this to the “post-quarantine times” for which loans “preserve fiscal space.”

Respondents supporting transfers over credit focussed on the unusual nature of the shock and the potentially irreparable damage to small businesses and parts of the retail sector. Jagjit Chadha of the National Institute for Economic and Social Research (NIESR) describes the coronavirus as a shock to firms which is “outside of their control or their direct responsibility.” He argues that firms have “no moral hazard question to answer” in requesting insurance from the government. Michael McMahon (University of Oxford) points to the “uncertainty as to how long [the periods of isolation] will last” as an argument against loans, which he views as “too much of a future burden for small firms to maintain employment if they face (nearly) complete shutdown.”

A substantial portion (one third) of panellists supported making unemployment benefits more generous, streamlined, or comprehensive. Further, this was a policy response in which respondents expressed higher degrees of confidence. They point to the potential scarring effect on labour markets of the deep recession we are likely to face. Respondents expressed concern that changes in the structure of labour markets—the gig economy and zero hours contracts—make existing social insurance arrangements insufficient. Francesca Monti, of King’s College London, uses this as an argument for the expansion and streamlining of unemployment insurance “to help self-employed workers, gig workers and the unemployed, so that they can keep afloat and make good of their financial commitments, even as their revenues dry up.” Morten Ravn of University College London (UCL) does not foresee “any negative impact on incentives” of extending unemployment benefits and “income support to low income households who lose their jobs or have problems paying rent, mortgages, etc.” For the well-off, however, he sees “less reason right now for providing transfers.”

Generally, there was consensus among panellists that a variety of measures—or “all the above”—should be employed. Tim Besley (LSE) emphasises the need for a “portfolio of fiscal measures” including “tax/transfer schemes, grants to businesses (particular those aimed at retaining workers) and credit support”—similar to what has been announced thus far–as well as “constant review” of the scale and scope of such measures. Panicos Demetriades suggests a “three-month holiday on mortgage payments and credit card debts backed by regulatory forbearance,” as well as allowing “withdrawals from pension funds without tax penalties while the crisis lasts” to “smooth consumption”. A number of panellists expressed support for partial (80%) wage subsidies along the line that the Treasury announced last week.[1] Angus Armstrong (NIESR) argues that it is “exactly the right move both economically and morally, which should not be ignored.”

Debt sustainability

UK government debt was above 80% of GDP at the onset of the crisis. The government’s fiscal package combined with the slowdown of the UK economy may bring public debt to over 100% of GDP. The panellists were also given an opportunity to opine about public debt levels:

Question 3: Which would be the maximal public debt you would be willing to tolerate if used effectively (as in your answers to 1 and 2 above) to support an economic recovery?











There was a wide range of responses to this question ranging from 100% to more than 140% of GDP. A third of respondents argued that fiscal concerns should be put aside and that the government should do “whatever it takes” to address current economic circumstances. The share of panellists putting no bound on the debt they’d be willing to incur is even larger, at nearly 60%, when weighing responses by confidence levels. Even those supporting lower desired debt levels expressed little concern about debt sustainability in current circumstances. The low real interest rate environment was a common argument for putting public debt concerns to the side. As Roger Farmer (University of Warwick) puts it: “In the current low interest rate climate, there should be no limit on the size of a temporary fiscal expansion.” Sir Charles Bean likens the coronavirus crisis to a “war”, in the sense of it being a “classic shock that warrants a temporary period of (possibly much) higher borrowing.” He argues that debt levels should be “put onto a gently declining path in order to create more fiscal headroom for when the next adverse shock comes along—as it inevitably will.”

References and Further Readings

Arnold, Martin. “ECB to Launch €750bn Bond-Buying Programme.” Financial Times, Nikkei, Inc., 19 Mar. 2020,

Baldwin, Richard. “It’s Not Exponential: An Economist’s View of the Epidemiological Curve.” VoxEU, 12 Mar. 2020.

Baldwin, Richard and Beatrice Weder di Mauro eds., Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, Centre for Economic Policy Research and VoxEU, 2020.

Bernard, Steven, et al. “Coronavirus Tracked: the Latest Figures as the Pandemic Spreads.” Financial Times, Nikkei, Inc., 24 Mar. 2020,

Brunnermeier, Markus, et al. “Throwing a COVID-19 Liquidity Life-Line.” Markus K. Brunnermeier, Princeton University, 17 Mar. 2020,

Coronavirus Disease 2019 (COVID-19): Situation Report - 58. World Health Organization, 18 Mar. 2020,

“Coronavirus: Chancellor Unveils £350bn Lifeline for Economy.” BBC News, British Broadcasting Corporation, 17 Mar. 2020,

Cowen, Tyler. “Policy Brief: Plans for Economic Mitigation from the Coronavirus.” Economics for Inclusive Prosperity, Mar. 2020,

Dupor, Bill. Possible Fiscal Policies for Rare, Unanticipated, and Severe Viral Outbreaks. Federal Reserve Bank of St. Louis, 17 Mar. 2020,

Furman, Jason. “Protecting People Now, Helping the Economy Rebound Later.” In:  Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, Richard Baldwin and Beatrice Weder di Mauro eds., Centre for Economic Policy Research and VoxEU, 2020.

Garicano, Luis. “The COVID-19 Bazooka for Jobs in Europe.” VOX, CEPR Policy Portal, Centre for Economic Policy Research, 20 Mar. 2020,

Gopinath, Gita. “Limiting the Economic Fallout of the Coronavirus with Large Targeted Policies.” IMF Blog, International Monetary Fund, 18 Mar. 2020,

Mankiw, Greg. “Thoughts on the Pandemic.” Greg Mankiw's Blog, 13 Mar. 2020,

“A Protective Shield for Employees and Companies.” Federal Ministry for Economic Affairs and Energy, Federal Government of Germany, 13 Mar. 2020,

@R2Rsquared. “** Package of fiscal policies for the quarantine times | Follows my earlier thread emphasizing the impact of #covid19 crisis on the productive capacity of the economy. Focusing policy on making the loss of potential output smaller and more transitory. [1/16].” Twitter, 15 Mar. 2020, 8.11 p.m.,

Saez, Emmanuel, and Gabriel Zucman. “Keeping Business Alive: The Government Will Pay .” Gabriel Zucman, 16 Mar. 2020,

Sevastopulo, Demetri. “Trump Administration Looks at Sending Money Directly to Americans.” Financial Times, Nikkei, Inc., 17 Mar. 2020,


[1] The survey was issued prior to the wage subsidy policy announcement.

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