Once a pandemic has been tackled, the economy should restart from where it had stopped and not from the point to which it has collapsed as a result of the tackling measures
- After the start of the COVID-19 pandemic, we realised that this is a reality that can often recur
- The economy must be put on pause so as to prevent its collapse during a pandemic
- How can the economy be put on pause
- The cost of putting the economy on pause for the State budget
- What will function while the economy is on pause
- To be workable and feasible, the model must be implemented by all countries in the same way and simultaneously
- After recovery from the COVID-19-induced economic crisis, it will be possible to determine with greater accuracy whether and how much more effective the model would be
Emil PopovGroup managing partner
1. After the start of the COVID-19 pandemic, we realised that this is a reality that can often recur
Nobody seems to doubt it any longer: the economic crisis into which the COVID-19 control measures are driving the global economy will be far more severe than the 2008 financial crisis. This faces world leaders and economists with a number of questions on how to forestall an economic crisis when a pandemic strikes again.
After the COVID-19 pandemic, the likelihood of a sudden occurrence of a similar infection rings all too real and, what is more, it moreover recur quite often (every year or every other year) and may even be caused by multiple viruses. This reality will stand in the way of calm and long-term planning and investment on the part of both individuals and companies because the risk of a pandemic ruining their income and business will make them very cautious indeed.
The likelihood of a frequent occurrence of new and simultaneous pandemics is a reality whose unpredictability will steadily press down investment activity if this invariably leads to an economic collapse, which, in turn, will slow down social development and will give rise to a plethora of problems.
Such caution about long-term investment will work to slow down economic development and growth, hamper the progress of social relations, decelerate the increase of people’s income and their standard of living, and may well disrupt public order and values and give rise to social problems.
This requires a pre-regulated global action plan even when a new pandemic risk emerges: what to do so as to prevent an economic crisis and job losses, erosion of income and decline of consumption not only in the country where the pandemic broke out but also worldwide. ⇑
2. The economy must be put on pause so as to prevent its collapse during a pandemic
In order to overcome income and investment insecurity and mitigate the devastating economic impact of the measures tackling a pandemic (or natural disaster), workable solutions must be implemented, whereby the periods of drastic restrictions intended to stamp out the contagion (one, two or even three months) would put the economy on pause and not destroy it, as in the present case of COVID-19. In other words, once the drastic infection containment restrictions are lifted, the economy, employment and consumption should restart from where they had stopped and not from the point to which they have collapsed as a result of restrictive measures.
Difficult or impracticable as such a solution may seem, it seems feasible and practicable to me. In order to resume a process you have to halt at the point you have reached, you should take action to immediately freeze-frame and pause the process for as long as it takes to do something radically different, after which you restart and resume the process from the point you have reached.
During a pandemic, the economy must be put on pause and once the pandemic has been tackled, the economy will restart from where it had stopped and not from the point to which it had collapsed.
It is more or less the same when you watch a film at home on a DVD player or on Netflix and you have to go to the bathroom: you pause the record, go to the bathroom, and when you hit the play button again, the film will resume from where it had been paused and not from the point to which it had advanced while you were in the bathroom (as was the case during the pre-VCR era). The only thing you lose is the time you spent in the bathroom.
In the pre-VCR and pre-Netflix era, if you needed to use the toilet while you were watching a film, you had to choose between missing what was probably the most exciting part of the film and putting your health to a test by holding back something toxic which you should discharge from your body. The present economic situation is similar to the time before VCR and Netflix. In our case, we had to choose between letting people die in order to save the economy on the one hand and keeping people alive and killing the economy on the other. Naturally, human life and health are more important but I think we can accomplish both things at the same time: people can be safe and sound with the economy left standing.
The ideal solution in this situation would have been to put the economy on pause until we solved the problem with people’s health and life, and then restart the economy from the point where it had stopped. Thus, the only thing we would have “lost” would have been the time it takes to safeguard people’s health and life.
If after the economic pause everything carries on as before, no person or business would be afraid to dream, to make bold plans for the future and to invest in them, no matter what pandemic befalls us.
If, after the time needed to safeguard human health and life in a pandemic, the economy is able to restart from where it had paused, no person or business on earth will be concerned or worried about how often a pandemic will come to befall us or how long it would take to tackle it. Such thoughts will not stop people and entrepreneurs from dreaming and making bold plans and investing in the future.
After the economy has paused, it will reopen with the same employment, income, consumption and growth rates.
After the economy emerges from the pause on which it was put in order to tackle the pandemic, nothing will be lost and everything will continue as it used to be: all those who were employed before the pause will be back to work after it, drawing the same pay, enjoying the same standard of living and readopting the same consumption routine, and the economy and social relations will continue to develop at the same pace as before the pause. ⇑
3. How can the economy be put on pause
Below, I formulate the principle of how the economy could be put on pause. Certainly, this principle could be elaborated taking into account all specificities of the world economy and national economies.
To put the economy on pause while pandemic control measures are being implemented, the solution requires halting the economy across the board rather than just parts of it – needless to say, with a specific number of inevitable exceptions.
At a well-defined point of time, all enterprises suspend operations, with a specific number of inevitable exceptions, and all employees are granted a State leave, for which they receive remuneration directly from the State for the duration of the pause.
Halting the economy across the board means that, at a well-defined point of time, when the pandemic-tackling measures begin, all enterprises suspend operations, all employees take a State leave, and from that point on no business has the right to dismiss employees and no business owes any payments to its workers, suppliers, creditors and the state budget until the day when the pandemic is declared overcome and the functioning of the economy restarts. All time limits and contractual relations are suspended during the pause except those that will keep essential institutions, industries and businesses going.
During the pause, companies do not have the right to dismiss employees and are not obliged to pay wages, or amounts due to suppliers, creditors and the budget. When everything is over, businesses will resume their payments from the point at which they were suspended and not from the point at which interests had accumulated during the idle time.
At the time when the economy restarts, no business would have lost any labour force and money and will continue to settle with its employees, suppliers, creditors and the state budget as if the economy had never halted in the first place. Certainly, all businesses would have incurred some minor expenses on maintaining their infrastructure during the pause but a legal framework will enable them to space out the payment of these expenses without difficulty.
While on State leave, people will pay only for food and medicines and will not pay rent, electricity, gas, water, telephone, television, loans, taxes, etc. After the pause, these expenses will be divided into instalments to be paid over the course of 12 or 24 months along with current bills.
Similarly, while individuals are on State leave, the State will cover all their expenses on rent, electricity, gas, water, telephone, Internet, television, rent, taxes and other such, and they will not be obliged to make these payments until their leave is over. Once the pandemic is over, the expenses built up during the leave will be divided into equal instalments to be paid over the course of 12 or 24 months along with the current bills under a dedicated legal framework.
All this immediately begs the question: how will people subsist during the period of pandemic-tackling measures when nobody will pay them any wages? As I mentioned above, all employees will take a State leave and the State will pay them enough money to buy food and medicine because they will not need anything else while at home. ⇑
4. The cost of putting the economy on pause for the State budget
Certainly, the first question that implementing this model raises is whether the State budget can afford to incur the expenditure that is State leave for all employees and forego the revenue from taxes and social-security contributions.
It will be less costly for the budget to pay a State leave to everybody so that the economy could restart after the pause from the same position and at the same pace than to inject financial resources into employment retention and a recovery of the economy and income and consumption rates.
Some will say: how will the budget of any one country hold out? Here is the baseline calculation for Bulgaria, and it will be very rough and ready, so that anyone could do the mental arithmetic. Bulgaria has a population of 7 million, of whom 3 million are generally in employment, 2 million are pensioners, 1 million are children, pupils and students, and 1 million neither work nor study (needless to say, part of the latter are actually abroad and work there). In other words, 3 million people work and sustain 2 million pensioners, 1 million children and part of 1 million non-working people. The proportions are probably similar in a large part of the developed countries.
If the State disburses BGN 380 monthly (as much as the average monthly pension in Bulgaria – if pensioners manage to make ends meet on this amount, everybody can) per person on State leave, this means that the State will spend BGN 1.9 billion on one month’s State leave for 3 million employees and 2 million pensioners, or 5 million people altogether, and will forego the collection of some BGN 1.5 billion in taxes and some BGN 0.6 billion in social-security contributions, which adds up to a total of around BGN 4.0 billion in budget expenditure and revenue losses per month.
To calculate the tax and social-security revenue losses, I assume that it will roughly stand at one-twelfth of the annual tax revenue during the month of the State leave and that consumption will nevertheless remit to the state budget at least some BGN 0.5 billion in VAT and excise duty and at least some BGN 0.3 billion in social-security contributions for the people who need to work during the lockdown.
All assumptions are rather general and quite conditional but the approximation to the overall numbers is sufficient for this general analysis..
When people are put under a State lockdown for which the State pays them a sufficient income, the lockdown will be far more stringent and effective and will probably be shorter.
The State lockdown leave will have a far stronger effect than closures limited to cafes, restaurants and shopping malls and a call to maintain social distance – because everything will be shut down, everybody will stay home, and anyone who breaches the lockdown will be severely punished because they have no business being out. When a subsequent lockdown is ordered, countrywide door-to-door deliveries of groceries and medicines can be organised very efficiently, including disinfection activities, so that nobody has to go out and risk getting infected by a fellow shopper or by the packaging of the goods purchased.
If the lockdown lasts for 1 (one) month, the State will incur budget expenditure and lose budget revenue totalling BGN 4.0 billion. If it lasts for a month and a half, the amount will increase to BGN 6.0 billion, and if it lasts for 2 (two) months, the amount will reach BGN 8.0 billion.
Even in the worst-case scenario of a two months’ long lockdown, this will cost the budget BGN 8.0 billion. At first glance, this is less than the BGN 5 billion or so that the State is preparing to withdraw from the reserve, plus an additional government debt of BGN 7.8 billion in order to finance the deficit and restore employment, incomes and the economy after the pandemic end of the crisis. We should add to this cost the BGN 9 billion worth of dedicated financial instruments and measures that the Central Bank and the banking system are planning, plus the losses and the claims and loans written off over the next couple of years as a direct consequence of the ensuing economic crisis, which will directly affect budget revenue during that same period.
After the pause, the economy will continue to generate the same taxes and they will grow predictably, just as before the pause, which will enable the budget to recover at a much faster and more predictable rate.
When the economy picks up from where it had stopped, this implies that immediately after its restart it will continue to generate taxes in the same amount it had generated before the shut-down, and instead of requiring financing for its recovery, it will start filling the public coffers at the same pace as before it was put on pause. This means that the money spent on State leave and the taxes and social security contributions foregone will be recovered much faster than all resources spent on a recovery of the economy, employment, incomes and consumption.
If the economy restarts from the point it had reached, i.e. without plunging into crisis, this will deter the emergence of shadow businesses which, in crisis conditions, will not be in a position to pay the full amount of the taxes due.
After the economic collapse, quite a few enterprises will experience liquidity and financial difficulties, which will tempt their owners to resort to evasive practices because the post-pandemic crisis conditions will prevent them from paying the full amount of the taxes due.
The collapse of the economy, employment and incomes invariably leads to a deterioration of the quality of public services, an erosion of values and an increase in crime rates, which comes at an abstract but extremely high price.
The collapse of the economy, employment and incomes invariably leads to a deterioration of the quality of public services, an erosion of values and an increase in crime rates, which comes at an abstract but extremely high price that, too, must be factored in and is best avoided, where possible.
If the budget of Bulgaria can afford to put the economy on pause and pay a State leave to all employees, then the economy of any other country can probably afford this, too.
Once the budget of Bulgaria can afford to finance such State leave, it follows that any other country could also do so. If the budget of any country in the world needs financing, this can be arranged by global financing mechanisms and regulations for financial assistance and solidarity.
The price paid by the budget for putting the economy on pause, even if this price has to be debt-financed, will afterwards be repaid very quickly by the economy operating at the same speed as before the pause.⇑
5. Which businesses will function while the economy is on pause
Needless to say, certain spheres and a limited number of industries and businesses will have to function in order to keep the State and people’s life going. These will be the State administration and the institutions, which will work entirely online when they really have to do something during the State lockdown leave. Whoever works will get their full pay, while the rest will get only the State leave benefit.
Central and local government, institutions, healthcare, education, the energy sector, the food processing and pharmaceutical industries, banks and the companies serving them, to the extent necessary to keep life going while the economy is suspended.
The following spheres and industries will have to function during a pandemic:
- Healthcare: must operate at over 100 % capacity and doctors will get full pay and bonuses, while hospitals will be supplied with everything they need to cope with getting the pandemic under control;
- Education: must operate at 100 % capacity, using distance learning, and teachers will get full pay;
- Law and order: must operate at 100 % capacity in order to enforce strict compliance with the lockdown, and police officers and the military will get full pay;
- The energy sector: must operate at 100 % capacity, with employees getting full pay and energy companies being financed through the banking sector, against the future State-guaranteed rescheduled claims from all customers, say, for 12 to 24 months, in addition to their current bills;
- Communications: must operate at 100 % capacity; where necessary, employees will get full pay and financing will follow the same pattern as in the energy sector;
- The food processing and pharmaceutical industries, as well as their supply chains, will operate to a considerable extent and will be financed from purchases by people on State leave;
- Freight transport and logistics: must operate to the extent necessary to meet the needs of the industries and those businesses functioning during a pandemic;
- The financial sector must also operate to the extent necessary to finance the functioning industries, whereas individuals and businesses will be exempt from current interest payments and principal repayments, which will be rescheduled and deferred respectively by law. The financial sector will definitely face a test in terms of cash flows but it will cope by all means.
Because of the frozen payments from individuals and businesses, functioning businesses will be financed by the banking sector, the State will guarantee future claims from individuals and businesses, and customers will pay their consumption during the pause together with their current bills over a period of up to 12 or 24 months.
Certainly, enterprises providing services to the functioning industries will also have to operate to a certain extent but all these exceptions are a limited number, can be set out in specific instruments, and the mode of their functioning during a State lockdown vacation can be defined by legislation. ⇑
6. To be workable and feasible, the model must be implemented by all countries in the same way and simultaneously
To be workable and feasible, the model of putting the economy on pause must be adopted by all countries worldwide because if some of them implement it and others do not, the economic crisis will remain inevitable.
That is to say, if half of the countries in Europe implement it, including France and Italy, but the other half, including Germany, Spain and Britain, do not implement it, the economies of the latter will not restart from the point they had reached but from the point to which their economies had collapsed. This will inevitably entail a shrinking of the economies of the former because the decline in employment, income and consumption rates in the latter group will bring about a decline in employment, income and consumption rates in the former group.
Unless the model is implemented in the same way and simultaneously in all countries, then the collapse of the economy, employment, income and consumption rates in the countries where the model is not implemented will result in a shrinking of the economy, employment, income and consumption rates in the countries which implement it.
Implementing the model in this crisis is no longer possible because all countries have taken different measures which, ultimately, will inevitably lead to a collapse of their economies and of the global economy. Implementing the model in future pandemics will be possible only provided it has been regulated in advance and everybody has agreed to it.
The model will be practicable if it is adopted by all countries in the world because this is the only way to ensure an immediate recovery of consumption, which will continue to keep employment, incomes and consumption at their pre-lockdown levels and will not force people and businesses to change their long-term plans but will merely put them on pause for the period of the pandemic.
The model gives world leaders a possible solution to convince people that a future pandemic of this kind cannot affect public and economic life the way COVID-19 has. This will tangibly reassure people, and they will be able to dream boldly and make long-term plans and investments without worrying that a seasonal pandemic may wreck their dreams and plans.
This model can be implemented for a single country where the epidemic starts, for a region of countries to where the epidemic has spread, as well as for most countries in the world, if the epidemic escalates to a global pandemic.
This model can be implemented for a single country where the epidemic starts, for a region of countries to where the epidemic has spread, as well as for most countries in the world, if the epidemic escalates to a global pandemic.
The most important condition for the model to be workable is that, after it is implemented in a single country (the first infected country), it must then be implemented in all other countries if the infection or pandemic calls for lockdown measures in these.
Unless the model is implemented in the first infected country and if this country is a very large economy, its subsequent implementation in the rest of the countries may prove pointless or have a negligible effect.
Unless the model is implemented in the first infected country and if this country is of the size of China or the USA, its subsequent implementation by the rest of the countries may prove pointless or have a negligible effect because the collapse of such large economies will inevitably lead to shrinking of the economies of countries worldwide.⇑
7. After recovery from the COVID-19-induced economic crisis, it will be possible to determine with greater accuracy whether and how much more effective the model would be
At this point, the model is rather general and with minimum details and, in this sense, does not claim to be a ready cure-all to the economy during contingency measures imposed to control a pandemic or another similar disaster. In this sense, analyses and calculations are worthwhile and if a working version of the model is developed, it could be adopted as a possible option for preserving the economy and society during a pandemic or a disaster that requires society to be put in lockdown.
After the end of the economic crisis resulting from the COVID-19 pandemic, when it will be possible to calculate exactly how much it had cost to restore the economy, employment, incomes and consumption, these costs can be compared with the expenditure incurred and budget revenue lost relevant to putting the economy on pause for the duration of the lockdown.
After the economy has recovered from the crisis resulting from the COVID-19 pandemic, it will be possible to make very accurate calculations of the price that was paid for recovery of the economy, employment, income and consumption rates and of the direct and indirect losses sustained by the financial sector, companies and the State budgets.
It will then be possible to compare these costs with the price of the model of putting the economy on pause and only then can conclusions be drawn as to whether and to what extent this model is better and more effective for the economy and society.
Upgrading the model to feasibility level will require in-depth scrutiny of many elements and details that will be subject to innumerable analyses, discussions with stakeholders, calculations, etc. ⇑