In response to the coronavirus pandemic and the chaos it has thrown labour markets into, many Western governments have responded with aggressive fiscal spending in the form of wage guarantees for furloughed workers.
The idea is simple: economic growth requires spending, and wages are one of the main sources of said spending, so providing money to those with bills to pay, and mouths to feed, while entire economies shut down makes sense. Particularly when the alternative is a downward spiral of missed mortgage payments, bills and deferred consumption that could send even the most robust of economies into a depression.
So far explicit wage guarantee policies have been announced in several countries, including the UK, Spain, Germany and France. The generosity of the schemes varies — in the UK, for instance, the government has guaranteed 80 per cent of wages up to £2,500 for an indefinite period, while in Spain the figure starts at 70 per cent, tapering off to 50 per cent after six months — but there is one certainty: the level of spending required to fund these schemes is unprecedented outside of a wartime economy.
But to what extent?
Helpfully Felix Huefner and his team at UBS have run the numbers, and it’s of little surprise that the figures are pretty extraordinary.
Via UBS:
The UK leads the pack, with UBS estimating that the scheme will cost around 0.225 per cent of annual GDP per week, when including the latest support for the self-employed. That’s around £6bn. For context, the NHS budget for 2019/20 (pre-pandemic) was £140.4bn, meaning it will take just under half a year of a wage guarantee to match the typical annual costs of universal healthcare.
Alphaville has long been of the view that the state’s fiscal capacity is far greater than most Western governments of the past decade would like to admit, but it seems we’re going to have that view put to the test now. The end of the equivalence between household and government spending? We do hope so.
