Current aid, future taxes.

Covid-19 triggered one of the biggest economic imbalances in modern times, bringing once again, enormous increases in unemployment rates, businesses foreclosures, and big production drops. To support this economic downfall, governments are investing hugely to try and soften the damage.

With this increase in government spending, both in companies and people, a new problem arises: how will this growing debt be paid off?

The obvious way of doing it would be through tax increases and government expenditure, or in other words, through austerity. The recipe is clear, but the trauma some world economies are suffering from austerity renders it somewhat unviable.

As a result of this crisis, governments will see their revenue drastically decrease, based on the almost nonexistent tourism and related activities, a commerce that is still, at a very slow pace, trying to get back to what it was. Also, low vehicle circulation greatly reduced fuel tax revenue. Not only now, but in the near future, consumers will probably still wary of their spending. In addition to direct problems, we also have to take into account indirect problems, like savings. Taking into account the current instability and an unknown future, most people have a tendency to increase their savings. And the ones who can’t do so might have to drain their savings and possibly get into debt. This, assuming the social-economic groups most affected by this crisis are the ones who have somewhat limited savings.

Photo by Alice Pasqual on Unsplash

To make things worse, this economic cycle has been pummeling small businesses that depend on people’s consumption and will take a long while to be back on their feet. They’ll need a lot of government support, even so, some of them won’t survive.

This hike in government spending will probably turn into an enormous amount of debt. Assuming this will happen, most countries, even at a higher risk, will have to issue bonds at attractive rates, due to investors having to assume a somewhat higher risk. This problem has a chance of being softened thanks to central banks’ intervention.

In particular, countries like Italy, Spain, and Portugal, that already had huge levels of debt, tanking into account their GDP, these countries recovery will be extremely difficult, which might infect other markets.

Without any realistic measures to prevent this incoming crisis, the road is set for another big hit in the World economy.

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