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December 3, 2020

How Covid could lead to wartime levels of government borrowing

By Paul Dennis

3 December

Faisal Islam, an economics editor at the BBC, shared a Resolution Foundation report on safeguarding governments’ financial health during the coronavirus crisis by taking examples from the previous crises.

The report anticipated double-digit hits to the gross domestic product (GDP), as well as borrowing earlier in March, weighing the losses to be the same as during the Spanish Flu and Ebola crises, rather than the 0.5 to 1% annual losses in GDP following the SARS outbreak.

The report also speculated economic impacts to last for months, if social distancing measures were to continue for indefinite periods.

Although the current pandemic cannot be compared to the East Asian countries’ V-shaped recovery from SARS in 2003, Spanish Flu and Ebola outbreaks are more relevant precedents for the current Covid-19 crisis, the article noted.

All three crises are marked by peaks and troughs of losses and output, making it difficult for economies to return to pre-outbreak levels.

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The report also probed into government deficit, which is expected to rise into high single or double digits as a proportion of the GDP.

Taking an example of West Africa, the report highlighted how economies ran into 5% and 9% deficits during the peak of the Ebola outbreak.

Likewise, the fiscal measures adopted during the coronavirus pandemic has been unparalleled and may even lead to wartime levels of government borrowing.

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