Fiscal Resiliency and Inequality

One of the most tragic consequences of COVID-19 is that, both economically and epidemiologically, it has affected most dramatically those with the fewest means to combat it. Death rates are disproportionately high for BAME and low socioeconomic groups, whilst furlough rates are highest in sectors with low median wages.

This is devastating, but it may shift public opinion towards favouring instituting pre-emptive fiscal resilience for future crises. This is a huge opportunity. A government that invests in stronger automatic stabilisers – such as a more flexible universal credit system where individual payments vary proportionately with unemployment rates – will be able to better protect the UK’s most vulnerable citizens from future economic downturns. It will also reduce macroeconomic volatility at large, increasing long-run GDP growth by stabilising investment.

If wages proxy resiliency to economic downturn, COVID-19 has made the median individual more vulnerable. They are thus more likely to support government measures to increase fiscal resiliency to protect them. Furthermore, resiliency of the median individual is smaller than mean resiliency. Resilience inequality is measured as the difference between them. COVID-19 has economically hit the most vulnerable the hardest, whilst punishing the highest earners (who raise the mean) less harshly, increasing resilience inequality. Where the median voter thus suffers from this increased inequality, the majority of the electorate should duly support combatting it, creating greater public support for government-instituted fiscal resilience.

COVID-19 has offered government a unique opportunity to protect the UK’s most vulnerable citizens from the worst effects of the next economic downturn. However, as we move away from this crisis and the electorate’s future discounting likely increases, public support for doing so may diminish. Thus, government must begin acting now to protect against the next crisis. It would benefit vulnerable individuals and the macroeconomy at large to do so.

 

 

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