How to choose among four different evils : higher taxes, economic austerity, unsustainable debt or some limited ‘helicopter money’? 

1. Conventional and orthodox stimulus package to respond to the double shocks 

Several countries have taken fiscal, monetary and financial measures to contain the Covid-19 health and economic shocks. They vary in their comprehensiveness , their adequacy , their timeliness, their targeted sectors and their duration. They contain both immediate policies to support workers, to assist entreprises and to ensure liquidity , credit and access to scarce foreign currencies, especially US$. Many countries have had to reinforce their first set of measures as the crisis deepens and extends.   Mauritius has also introduced some stimulus measures by way of fiscal support, monetary and financial easing. 

But they are largely inadequate in view of the significant amount that is required 

i) immediately to support employees both in the formal and informal sectors, SME’s, and other firms which are severely impacted by being prevented from working for a long period of time. Both people and enterprises should survive during the lockdown while waiting for the economy to restart , albeit slowly and gradually . Spending on the needy at this time is a high priority, the right thing to do as a humane nation, as well as a contributor to the fight against the virus.

ii) in the very short term to ensure that we mitigate the impact of a recession. The objective is not to eliminate the recession altogether. The recession is already here and it will be massive. The two crucial questions are how deep it will be and how long it will last .  And these will determine  thetiming , nature and size of the stimulus package. Especially as the spread of the disease, the policy responses, and individual and corporate behaviour are unknown.

It is plain than conventional fiscal, monetary and financial measures , while necessary, will not be enough to bail out people , SMEs and other affected sectors such as travel,tourism, Air Mauritius, and the EPZ . Equally important is the fact that Government has very limited ammunition in its artillery. The fiscal deficit is high while public sector debt is exorbitant . Both will increase with the stimulus plan presented by Government and the external debt being contracted .

Government has three conventional instruments in its tool kit to confront the public health emergency and its consequential economic contamination . I am excluding colourable devices to hide some facts and figures or to do things by stealth. It can raise taxes ( which it has already done by imposing another Rs 4 per litre of mogas and diesel) . It can introduce austerity measures by slashing recurrent and capital expenditures or reprioritise some of its spendings as automatic stabilisers decrease its tax proceeds ( there has been some symbolic but not impactful announcements) .  And it can borrow to finance its significant incremental outlays especially if the pandemic lasts longer ( or there is a resurgence) or it needs substantial firepower to resuscitate the economy ( which it is doing with the IMF,the World Bank and other DFI’s. 

All three have their limitations and drawbacks. More taxes and economic austerity will depress aggregate demand further, thus worsening the already severe economic downturn. Raising debt internationally carries the risks of a huge dollar depreciation and a high interest rate as markets have tightened. More borrowing locally will raise the level of debt to GDP even if its servicing might be low with plummeting interest rates on government papers. Even if we relax rules of fiscal deficit ( 3 % of GDP) and debt ( 60 % of GDP) , it will be difficult to sustain a stimulus package that runs into 10 % or more of GDP when we consider both immediate needs and short term requirements. Or even to match the amount of the support to the decline in GDP that we could expect in 2020 ( which will be very high).        

2. Looking for bold , innovative and unconventional financing of the massive deficit

Of course, we should continue to use conventional fiscal, monetary and financial policies as long as they can help out as quickly and efficiently to support the absolute needs of our compatriots and in the economic regeneration. We certainly need flexibility in fiscal deficit and debt rules and in monetary guidelines to navigate this unprecedented crisis . It is clear that either they will not be enough or their excessive use may inflict permanent and structural damage to our economic and social fabric ( higher taxes, greater austerity, unsustainable debt). Government has a responsibility to focus on mitigating that structural and permanent economic damage. 

This is the time to start thinking of bringing out the heavy artillery as we are in a war like situation fighting an invisible enemy. The medical shock is transitory. It will dissipate as scientists  will develop a vaccine and curative treatments. The economic damage could be persistent . The EU and  othercountries are taking unprecedented measures to support their economies , even those never thought before. 

Given the need for large fiscal deficits, the debate about helicopter money really involves two distinct policy questions. The first is how to finance the stimulus . Should the central bank pay for it through direct monetary financing, effectively printing money, or should governments borrow in the usual way? . The second is how the money is then distributed, whether through cash handouts or other government spending.

This is not a time to be timid or faint hearted, but time to introduce increasingly bold anti-recession measures and do what it takes to save the economy and protect the livelihoods of our compatriots. Otherwise, unemployment will rise, companies will close down and poverty will spike among our vulnerable families which are already feeling the brutal impact of lockdown and isolation.      

Things are moving very fast, and our minds, attitude and thought process should too . Economic taboos are being broken to finance the huge government deficits needed to fight the crisis. This is where some form of financing that delivers vitally needed resources to Government without raising the burden of debt is being proposed. For a very limited time and under strict conditions to prevent any abuse and to terminate it once the pandemic is over. Of course it has to be in complementarity with the other ammunition that Government is deploying. The idea is to fund emergency requirements without shifting the burden on our children and grandchildren.  

Let me be very clear and frank. I am against this policy under normal circumstances. I am advocating it solely because we are in an emergency and a war like predicament. If there is a  massive purchase of the newly issued debt through anexpanded quantitative easing programme, the debt ratio of Government would certainly increase with the risks of putting public finances on an unsustainable path. 

3. Some exceptional helicopter money to fight the Covid 19 health and economic viruses

There is a viable alternative to a strategy based on higher taxes, greater austerity and/or more government debt in order to finance such an emergency economic programme .

Surprisingly it is both simple and complex. It is a direct funding by the Central Bank in collaboration with the Government. Technically it called the monetisation of fiscal deficits . Some people label it ‘helicopter money’ , or printing of money ( actually it is electronic transfer). I am surprised that some well intentioned economists are confusing between the typical quantitative easing ( which is an exchange of debt for money) and  the monetisation of the fiscal deficit by the Central Bank.  An excellent but simple video interview on You Tube by Lord Adair Turner, former chair of the Financial Services Authority clarifies this point by emphatically and unequivocally statingthat helicopter money would provide strong stimulus without increasing the public debt burden.

In the current context, the central bank would credit the government’s account for the amount of the additional transfers and for the duration of the programme. That credit would not be repayable by the government. From an accounting viewpoint, it would be captured by a reduction in the central bank’s capital or in that case by a permanent annotation on the asset side of its balance sheet. It should not have an impact by itself on the central bank’s profits which are periodically transferred to the government. It should be noted that such a transfer of profitfrom the central bank to the government would be equivalent to a commensurate purchase of government debt by the centralbank, followed by its immediate writing-off, thus no longer having an impact on the government’s effective debt liabilities.Essentially what Sir Adair Turner has stated.

The late and Economics Nobel Prize winner Milton Friedmanargued that in the event of a repeat of a 1930s style depression, if all else failed, money could be scattered across the land from a helicopter. He thus coined the term ‘helicopter money’. He was neither a hard left socialist not an inflation lover. In the UK, the Labour Party has proposed a “People’s QE", whereby the central bank would print money to finance direct fiscal transfers to households—rather than to bankers and investors. Many mainstream economists  have called for direct cash transfers to consumers through central bank-financed fiscal deficits because of the severe damage caused by the virus. Ben Bernanke has publicly argued that “under certain extreme circumstances” monetary financing of fiscal deficit spending “may be the best available alternative”. In India  a former Governor of the Reserve Bank has also recommended it because of the exceptional economic damage being inflicted on people and enterprises . Former Fed Vice Chairman Stanley Fischer and his colleagues at BlackRock, have proposed a “standing emergency fiscal facility", which would allow the central bank to finance large fiscal deficits in the event of a deep recession. And we are in a deep recession and it could lead to a 1930s style depressionif we do not act decisively and unconventionally.

For instance ,every year the Bank of Japan buys Japanese government debt equal to the government deficit. So the volume of bonds owned by the private sector does not rise. That is permanent monetary finance, As simple as this .

But it is also complex.

4. Ensuring its one time use , transparency and accountability 

We should strictly ring fence its use to prevent any abuse for political economy reasons. There are moral hazards as unscrupulous Government could use it even for non-emergency purposes. 

In the case of Mauritius we could impose the following conditions

i) It should be a once in a life time access. The financing would be strictly restricted to the  emergency measures linked to the health crisis and its economic fall out . So that it does not erode trust and confidence in our economic and financial system. Priority should be given to ensure that employees and self employed remain employed and collect their wages as households need to be able to make basic payments ; that firms can weather the storm without going into bankruptcy, with easier borrowing terms, possibly temporarily waving tax or payroll payments, suspending loan payments, or providing direct financial assistance where needed. And to support the financial system as non-performing loans will rise, so as to ensure that the economic crisis does not translate into a financial crisis;

ii) It should be for a very limited period only ( I have suggested three months ..but it could be slightly longer if the crisis persists);

iii) The independence of the Central Bank should be respected in as much that it should decide the quantum and duration of the facility , albeit in collaboration with Government. Politicians should not be given a free ride to abuse this exceptional facility;

iv) It could be locked into a Bill passed by the National Assembly for a very specific purpose with an agreed time frame. Details of the expenses should be clearly spelt out;

v) A special committee of the Assembly with cross aisle membership could be set up to monitor the use of the fund and to ensure transparency and accountability ;

The risk is that, once governments discover how easy it is to fund their spending plans, it will be hard to put this genie back into its bottle. We should at all costs avoid this moral hazard.

vi) The amount should not be too high as it could impact inflation ( no risks of runaway inflation if well managed and executed with low current inflation ) and on the value of the currency.

A team of competent and experienced people could work out the numerous practical operational and implementation issues to determine the size of the facility and who will be entitled ( employees, self employed, SME’s and affected sectors) . Let us be candid. There will be some casualties. Some companies may be not just illiquid but also insolvent and Government has to decide how to proceed in these cases. Some difficult choices should be made between debt structuring and write offs as opposed to an all-out bailout.

We could utilise the remaining part of the Rs 18 b transfer from the BOM to start the process. Provided it has not been used already to meet recurrent expenses. The unrealised gain of the official reserves would have gone up with the sharp appreciation of the US$ since January 2020.  And lastly we should resort to a partial monetisation of the incremental deficit triggered by the public health emergency and its economic impact .   After using conventional policies.

5. Concluding remarks

I am certainly not an advocate of monetising high fiscal deficit in normal circumstances. But these are unprecedented times and the only reference we have to draw lessons is the Spanish flu that occurred 100 years ago. I will be frank. Mistakes will be made as we have never experienced such a double ‘black swans’. A public health emergency that is becoming an economic catastrophe and which itself could morph into a financial crisis and a foreign exchange shortage. 

Our country is ill prepared to face this crisis as it has arrived at the wrong time when the economy is in dire straits and the fiscal space very limited.  Economic proposals that a week ago looked radical now appear timid. Fiscal packages bigger than anything seen in decades are considered too small only a few days after they are announced. There will be more stimulus packages. And rightly so .

The real danger is that the virus is mutuating and infecting our economic system even as we try to root it out of our bodies. Its economic form is certainly not as deadly, but it can do real structural damage by destroying livehoods and the complex network of economic linkages that oil our economy  and that would take considerable time to repair.

These are indeed exceptional times. We need exceptionalsolution. 

Better safe than sorry .

We must act now and do what it takes to save the economy. Including not ruling out helicopter money .

Recommended reading: 

https://www.freshbusinessthinking.com/is-it-time-for-helicopter-money-drops-fuelled-by-the-money-printing-press/?utm_campaign=shareaholic&utm_medium=email_this&utm_source=email