What are the government stimulus packages and what do they actually mean?
During these unprecedented times the Corona Virus pandemic has impacted so many lives in so many ways. The fact that every country in the world is affected and having to take measure to help support their economy will have such profound long-term consequences that governments are forced to take actions never before seen. You have probably seen the headlines: Australia pumping $66Billion into their economy, Spain €200 Billion, UK £500 Billion, USA $2Trillion, the list goes on.
Where does this money actually go? Most of the funds are actually in the form of tax breaks. This is to make sure that when businesses are up and running again, they do not have to worry about paying their tax bills which are usually first on the list for companies to pay. This is helping to make sure that cash flows stay within the business to keep them going. If this is not enough then there are grants or low-cost loans available to business. Next is making sure that employers retain their staff, unemployment in itself is very costly as not only do benefits have to be paid but the Government loses income from taxes that employment gives them. Securing wages of staff is a measure that I cannot ever remember being utilised but that is what some governments are doing – as seen by the UK measures of protecting 80% of employee’s income.
There are also many other imaginative measures that countries are employing to keep the economies going. Australia are allowing people to access their pension funds early up to a maximum of $10,000 per person from their superannuations, USA taking equity stakes in some businesses and sending out cheques to low income families of up to $3,000. In the UK many measures including a 3-month mortgage holiday. Governments are having to be very creative to ensure the economy keeps running.
It might sound like a lot of cash is being pumped into the system, but it is vital as the consequences could be much more serious. Keeping money in the pockets of people keeps the world going. The ability to keep business going by allowing spending to continue makes sure that businesses and farming continues. It is unlikely a business would reopen once closed. Also, the morale of the population is critical. What all governments are desperate to avoid is a depression. Some might say a recession is inevitable, but it is usually over a short time period, but a depression would last years and might see a countries economic standing in the world disintegrate.
The markets have had huge losses posted over the recent weeks. As this is an unprecedented situation and the the future is somewhat unpredictable which is what the markets dislike and to some degree a worst-case scenario is included in market prices. Already there are signs that some of the government interventions are having a positive effect. There are some companies that will be lost and may go out of business, especially in the tourism/travel sector but the majority of other companies will benefit from their governments support.
Life may never be the same after this Crisis but companies and Governments that have put the correct measures in place to look after their people and business may flourish in the long term.