Comparing U.S., Japanese, and German Fiscal Responses to Covid-19
On March 11, 2020, the World Health Organization declared the Covid-19 outbreak a global pandemic. To combat the virus’s spread, governments implemented restrictions on economic activity unprecedented in peacetime. Within weeks, countries had pledged massive fiscal and monetary support to mitigate the largest economic shock since the Great Depression.
In the six months after the pandemic was declared, the International Monetary Fund (IMF) estimates that countries had announced $11.7 trillion in discretionary fiscal support, nearly 12 percent of global GDP and much more than the amount approved to respond to the 2008-2009 Global Financial Crisis. Advanced economies entered the crisis with historically low interest rates, limiting the expansionary impact of monetary policy and underscoring the importance of aggressive fiscal responses. Nonetheless, central banks have supported fiscal spending with extraordinary balance sheet increases and liquidity measures, which have calmed financial markets early in the crisis and maintained accommodative deficit financing conditions.
As U.S. policymakers debate additional fiscal relief, it is helpful to compare U.S. efforts to those taken by other advanced economies. Analysis of fiscal responses in the United States, Japan, and Germany—the three countries that have approved the most support—presents several observations to inform future policy. Most importantly, fiscal support has been essential to saving lives and livelihoods. However, the nascent U.S. recovery remains fragile and faces significant uncertainty. With most assistance programs having expired over the summer, most prominent economists, including Federal Reserve chair Jerome Powell and IMF managing director Kristalina Georgieva, have stressed the need for further spending in the near term. As the United States emerges from Covid-19, bold investment will be necessary to sustain the recovery and prevent long-term scarring from the crisis.
U.S. Fiscal Support: Aid Stalls since the Summer
In March and April, the United States deployed aggressive fiscal and monetary policy to contain the economic impacts of Covid-19 and associated public health measures. Through mid-September, the IMF estimates that the United States had approved $2.4 trillion (11.8 percent of GDP) in additional spending and foregone revenue and $510 billion (2.5 percent of GDP) in liquidity support. However, most of the fiscal aid expired by the end of July, and new support has not been approved.
The initial $200 billion in U.S. fiscal support, signed by President Trump on March 6 and March 18, authorized immediate virus response and mitigation support through testing and vaccine development, as well as expanded paid sick leave, food assistance, and funding for unemployment insurance. The flagship $2.3 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed on March 27, provided significant support for households and businesses. The CARES Act greatly expanded unemployment benefits, including for temporary or “gig” workers, and provided a one-time cash transfer to most residents. Unlike Germany or Japan, the United States did not provide direct wage subsidies. However, the CARES Act authorized loans to small businesses that could be forgiven if recipients retained the majority of their workers. Rather than issue loan guarantees, as many European countries did, the CARES Act authorized $454 billion to backstop Federal Reserve low-cost credit facilities and $56 billion in concessional lending for distressed industries. The CARES Act also included aid for state and local governments, as well as hospitals. Finally, on April 24, the president signed the Paycheck Protection Program and Health Care Enhancement Act, which recapitalized small business lending facilities, expanded virus testing, and provided additional support for hospitals.
Since April, Washington has not provided significant fiscal relief, aside from several August executive orders that extended some existing programs. Negotiations on further spending have stalled since May, although new legislation is expected after the November election.
Japanese Fiscal Support: Focus on Sustaining Business and Promoting Resilience
In response to the crisis, Tokyo has approved two relief packages, resulting in its largest-ever annual relief budget. Tokyo advertises headline support at 40 percent of GDP, although that figure includes some previously approved measures and liquidity measures that may have yet to be disbursed. Still, by any measure, Japan’s response is one of the largest in the world. According to the IMF, Japan has approved $555 billion (11.3 percent of GDP) in additional spending and foregone revenue and $1.2 trillion (23.7 percent of GDP) in liquidity support.
The first supplementary budget of ¥25.7 trillion ($240 billion), approved by the Japanese Diet on April 30, focused on emergency support to save lives and protect livelihoods. The budget included funds to distribute personal protective equipment and increase hospital capacity. The majority of new spending went toward cash payments to individuals and businesses, including a ¥100,000 ($950) payment to all residents, transfers and rent relief for low-income households, and direct payments to small and medium-sized enterprises (SMEs). The supplementary budget expanded existing wage subsidy programs by increasing the share of wages covered by the government (to 90 percent for SMEs and 75 percent for large enterprises) and enlarging coverage to part-time workers, both on the condition that companies retain employees (similar to Germany’s Kurzarbeitergeld program discussed below). The initial package also included some forward-looking measures, including voucher programs to encourage domestic services consumption (especially tourism and restaurants) once conditions were safe, infrastructure investment subsidies (especially for sustainable projects), and incentives to diversify supply chains away from China.
On June 12, the Diet approved a second supplemental budget of ¥31.9 trillion ($298 billion), which largely underwrote low-cost loans to businesses and recapitalized programs from the earlier supplementary budget. Roughly one-third of the second budget subsidized concessional loan facilities from government-controlled policy banks, while another third was reserved in a contingency fund. The remainder included additional funding for wage subsidies, targeted cash payments, and rent support for SMEs, as well as support for hospitals and medical providers. Finally, the budget included modest funding for longer-term goals, notably upgrading existing telecommunications infrastructure ($477 million) and artificial intelligence development ($13 million).
Alongside the two supplementary budgets, Tokyo approved ¥26 trillion ($247 billion) in tax and social security payments deferrals for businesses and authorized up to ¥125 trillion ($1.2 trillion) in loan guarantees and concessional financing through public and private financial institutions. As a result of the support, total lending by Japanese banks and shinkin credit unions increased at a record pace over the summer and remains far above pre-crisis levels. Thanks in part to additional credit, the number of corporate bankruptcies in Japan declined to a 31-year low in September, although this has raised concerns about an increase in unprofitable “zombie companies” sustained by government bailouts.
Prime Minister Suga’s cabinet is currently discussing a third supplementary budget to avert a sustained recession. The package could reportedly focus on the tourism and restaurant industries, which have both been severely impacted by the economic downturn, as well as a potential minimum wage increase.
German Fiscal Support: Immediate Relief and Long-Term Investment
Germany, long known for its fiscal austerity and aversion to deficits, has spent heavily in response to the crisis. Berlin crafted its relief based around “four Ts”: targeted, timely, temporary, and transformative (through digital and green investment). The IMF estimates that Berlin has approved $316 billion (8.3 percent of GDP) in additional spending and foregone revenue and $1.2 trillion (30.8 percent of GDP) in liquidity support (loans, equity, and guarantees). Germany has been praised for its ambitious and swift spending, and Japan reportedly designed some of its relief programs based on Berlin’s model. At the European Union-level, Germany championed the landmark €750 billion ($878 billion) bloc-wide recovery package.
On March 23, the German federal cabinet adopted a supplementary budget and economic stabilization fund to address the economic fallout of the pandemic. The budget included €122.3 billion ($144.5 billion) in additional spending and €33.5 billion ($40 billion) in tax relief. The majority of the spending went toward immediate grant assistance to SMEs, increased welfare payments, additional funding for hospitals and medical providers, and expanding Germany’s wage subsidy program (Kurzarbeitergeld), which reimburses employers for the wages of furloughed employees. The supplemental budget reduced the requirements for receiving wage subsidies, and in August, Germany extended the duration of support 12 months to the end of 2021. Under the program, employees whose hours have been reduced are eligible to receive at least 60 percent of their wages.
The economic stabilization fund included €957 billion ($1.1 trillion) in federally administered loan guarantees and equity investments in significantly affected companies. Despite the size of the guarantee framework, a July Peterson Institute analysis found that only €36 billion ($42 billion) of German loan guarantees, or 5 percent of the total amount available, had been committed through June 29. Similarly, a September European Central Bank (ECB) study found low take-up rates of loan guarantees in Germany compared to Spain and France. Both reports cited demand- and supply-side factors for the limited lending uptake, although the ECB study credited loan guarantees with generally keeping financing costs low and supporting liquidity, as well as boosting market confidence.
On June 29, the German Bundestag approved a second supplementary budget of €130 billion ($154 billion) with 57 measures to address both immediate financing needs and longer-term recovery. The package includes a €300 ($350) cash payment to families for each child, a €25 billion program ($30 billion) to compensate 80 percent of the operating costs for small businesses especially impacted by the shutdown (up to €150,000, or $177,000), and a €20 billion ($24 billion) value-added tax cut. The second budget also included a €50 billion ($59 billion) future investment program organized around reducing Germany’s carbon footprint and promoting digital innovation. This includes subsidies of electronic vehicles, development of a nationwide 5G telecommunications network, and increased investment in artificial intelligence.
Germany is currently finalizing its 2021 budget, which would include €96.2 billion ($114 billion) in net borrowing, including to further green and digital investment goals. Under current budget projections, net borrowing would fall to just above €5 billion ($5.9 billion) in 2024 as the country emerges from the Covid-19 pandemic.
Based on our analysis of fiscal support across the United States, Japan, and Germany, we draw seven observations to guide future policy:
- With limited or no room to cut interest rates, advanced economies (AEs) have relied on fiscal levers to mitigate the crisis. Central banks have played a complementary role by expanding balance sheets to keep financing costs low. Despite record budget deficits, policymakers in Germany and Japan have signaled that they are committed to preserving fiscal support until the crisis is over. The United States will likely follow suit eventually with a fifth fiscal aid package. Emerging market (EMs) economies and low-income countries (LICs) face much greater financing constraints, and thus have limited fiscal policy space. Greater debt relief, where needed, and assistance from international financial institutions can help EMs and LICs achieve more rapid recoveries and avoid long-term scarring from the crisis.
- The unemployment rate increased rapidly in the United States due to temporary job losses but remained comparatively more stable in Germany and Japan. While direct comparison of national labor markets is difficult because of different hiring practices, wage subsidy programs in Germany and Japan likely helped dampen initial shocks. However, while wage subsidies can mitigate temporary job losses, they could also prevent efficient reallocation of jobs to productive sectors in the recovery.
Although the United States has recovered about half of the jobs lost since April, several million people have left the workforce, and permanent job losses are increasing faster than during the Global Financial Crisis. Further, job losses have disproportionately impacted Black and Latino workers, who accounted for 23 percent and 21 percent, respectively, of long-term unemployed workers during the third quarter.
- Despite divergent unemployment rates, fiscal support has helped preserve personal incomes across all three countries. In the United States, expanded unemployment assistance and cash payments helped defray lost wages, while in Germany and Japan, wage subsidies and direct transfers help keep incomes relatively stable. Thanks to increased spending, the estimated U.S. poverty rate declined from February to June. However, it has increased from 9.3 percent in June to 11.1 percent in September as relief programs have expired. Over this time, an estimated 6-8 million U.S. residents have fallen into poverty, with disproportionate impacts for Black people.
- Federal loan guarantee and low-cost credit facilities have not been heavily utilized in Germany or the United States. As mentioned earlier, through June 18, 3 percent of Germany’s loan guarantees had been disbursed. Similarly, as of September 30, the U.S. Federal Reserve had disbursed $2.2 billion under its Main Street Lending Program, amounting to 3 percent of the $75 billion in equity provided by the U.S. Treasury for the facility. The lack of uptake could be a result of several factors, including the low cost of credit in commercial markets, relatively strict guidelines to federal programs, and rollout issues. Further, the lack of disbursements indicates much smaller fiscal outlays than headline numbers, at least in advanced economies.
- Targeted support was generally more effective than broad transfers. Recent studies on initial fiscal responses found that unemployment assistance was more effective than broad “stimulus checks” in reaching households in need. In the United States, higher-income recipients of checks approved in the CARES Act were less likely to spend than lower-income households. When considering the longer-term recovery, the IMF concludes that targeted transfers and tax relief have resulted in much higher increases in output than broad, untargeted measures.
- U.S. fiscal support has focused on addressing the immediate impacts of the crisis, while Japan and Germany have authorized funding for long-term recovery. U.S. fiscal support thus far has focused on the “cessation,” or keeping individuals and businesses solvent amid temporary restrictions on economic activity. In contrast, Japan and Germany have approved forward-looking investments to increase sustainability, innovation, and resilience while averting a sustained recession.
- The nascent recovery is fragile and incomplete, with many downside risks. Although conditions have generally improved in AEs since May, significant risks remain, including the possibility of a delayed vaccine or lengthy deployment, an ineffective vaccine due to viral mutations, and tightening financing conditions that constrain fiscal policy. There is also a smaller upside risk of an earlier-than-expected vaccine that is effective and rapidly deployed.
Countries have taken extraordinary actions to respond to Covid-19 and save lives. Fiscal support, thus far, has been necessary for preserving livelihoods and sustaining businesses. However, there is an urgent need for more aid in the United States with falling incomes, rising poverty, and a resurgence of Covid-19. The next relief package should seek not only to mitigate the immediate crisis, but also to address long-term structural challenges like inequality and climate change. Despite record deficits, there are accommodative conditions for financing, especially low interest rates, low inflation, and underused capacity. Further, advanced economies, and especially the United States, can and should support low-income countries with vaccine distribution and deployment. As policymakers consider the next phase of recovery aid, they should seize the opportunity to build a more inclusive, sustainable, and innovative economy.
Matthew P. Goodman is senior vice president for economics and holds the Simon Chair in Political Economy at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Dylan Gerstel is a research associate with the CSIS Economics Program.
This commentary is based on research conducted under a project generously supported by the Embassy of Japan.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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