Monday, August 10, 2020

Austerity will not end the pandemic and the crisis

How far will 162 billion-peso allotment from the Bayanihan 2 take us for the rest of the year under the pandemic?

The economy lost almost 820 billion pesos in GDP in Q2 2020 alone. To offset this first-semester contraction, the GDP must grow by an average of 8.6 percent for both Q3 and Q4 2020. This means that economic activities must be able to generate at least 430 billion pesos additional value in both Q3 and Q4 2020 and this will only result in a net growth of 0 per cent for 2020. But is this even possible?

An 8.6 percent growth in Q3 2020 is already unlikely because of further losses the economy is expected to incur due to the re-imposition of MECQ in NCR and surrounding urban areas known to contribute the most to the economy.

Is the economy set to spring back in Q4 with just a little fiscal nudge? The possibility remains slim as utilization of existing production capacity, as well as demand, remain limited due to still uncontrolled COVID spread. Because of this slack, investors will not drive the recovery. They will not even want to borrow except to pay the rents, some wages, and keep the lights on. Incomes have been lost, so no one should expect “revenge consumption” to be the immediate driver of recovery.

Expansionary fiscal policy is one of the textbooks approaches in addressing economic crises. By stimulating economic activities, government spending can be instrumental in lifting the economy and saving jobs. However, the effectiveness of fiscal policy is also determined by its size. With a small stimulus, the direct effect on the economy will also be small.

Do legislators rely on multiplier effects of government spending to do a miracle and cause an exponential increase in output of the economy even with a measly amount of P162 billion? Rep. Stella Quimbo, the principal author of the ARISE bill which provides way larger fiscal stimulus for the economy, notes that a one-peso government spending will generate 1.53 pesos in output. Based on this value, Bayanihan 2 will cause roughly 248 billion-peso increase in output and even this amount is not enough to offset what the economy already lost.

Note however that the estimate of the multiplier effect must have been computed using past data collected when the economy was performing well. Currently, the multiplier effect of fiscal policy is impaired because of limited production capacities of firms and changes in consumer behavior because of the crisis so government spending will generate fewer secondary effects in the economy. This means that smaller stimulus, such as the amount Bayanihan 2 provides, will generate an impact even smaller than 248 billion pesos and thus will not suffice for immediate economic recovery. The longer economic crisis also prolongs joblessness and income and welfare loss for workers and their families.

What is needed now is a larger fiscal stimulus. Austerity will not create a way out of this crisis. Thus, NAGKAISA urges the government, especially the legislators, to adopt at least 1.3 trillion-peso stimulus program that will save key economic sectors, preserve existing jobs and generate new employment, secure the income of households, improve health policy and anti-COVID response, and create safe industries for workers. This amount will not only secure jobs and welfare of workers, this will also provide the needed stimulus for the economy.

NAGKASIA! Labor Coalition
10 August 2020
On the passage Bayanihan 2

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