Question

List the limitations of fiscal and monetary policies in mitigating the effects of an economic downturn stemmed from Covid-19.

Answer 1

A fiscal policy refers to the use of government spending and taxation policies to influence the macroeconomic conditions of the economy like demand for goods and services, employment, inflation etc. The policies adopted may be expansionary, neutral or contractionary and involves actions like buying and selling of government bonds, inducing money in to the market etc. A monetary policy refers to the actions taken by the monetary authority of a nation so as to influence the economic conditions. These policies can also be expansionary, contractionary or neutral depending on the persisting economic conditions and involves actions like variations in the interest rates, changes in reserve requirements of banking institutions, variations in lending patterns etc.

                                    The spread of Covid 19 pandemic across the globe has till date caused serious implications on the world economy. Here, almost all the monetary authorities and government mechanisms are forced, all over the world to introduce many policies so as to combat the effects caused by the actions following the spread of the pandemic. But the following are the limitations that the system has to introduce such measures.

· Although due to shutdown process, a lot of industrial production activities are stalled, the government is still expected to protect the interests of the working class and spend more money on the sector without any gains expected from it.

· The health expenditure is huge and the government has no other means to resource the wealth. Thus, they are forced to introduce more money in to the market without expecting gains.

· Although tax rates are expected to rise in such situations, the deficiency of working conditions would make this difficult for the people and thus such actions are limited.

· Tax and fee collections are stalled and hence results in the decrease in revenue requirement to deal with such exigencies

· The states are forced to use the fiscal reserves to deal with such situations since the generation of revenue stands as a problem.

· States are expected to focus on public health and public care rather than focus on economic growth at such situations and thus normal reactionary measures to stabilise an economy may not be entertained for the better management of the society.

· The productive capacity of the people of the state are limited due to severe lockdown measures imposed in many nations. Thus the GDP of the nation gets affected and the country will be left with loss of revenue to enact fiscal and monetary policies and at the same time would be expected to perform expansionary policies so as to induce more money in to the market to spend for healthcare and basic public needs.

                                                     All the above situations cause limitations to the state to enact normative monetary and fiscal policies at this time. Thus, during such unexpected situations, these kinds of normal operations are limited and unexpected operations have to be carried out so as to manage the people better.