Question

Explain how the COVID-19 affects the fiscal balance of a government for the year.

Answer 1

Covid-19 leads to a slowdown of the Economy by restricting the Production of good and Services and through restricting demand for the goods and services. Thus, the Aggregate Demand in the Economy goes down. To revive the Economy (to increase Aggregate Demand) and provide with workers and people with income support, Goverment will have to incur more expenditure this year as compared to last year. Moreover, since Aggregate Demand is low and income is also low. Consequently, Tax Revenues of the government would also be low.

Therefore, Due to Covid-19, Government expenditure would be certainly increasing and the tax Revenues would be falling. Thus, for this year, Government is going to incur huge Deficits. Fiscal balance of the government would move towards a deficit.