Viet Nam Can Afford a Larger Covid-19 Support Package
Op-ed by Prof. Jonathan Pincus, UNDP Senior International Economist
front of a beef noodle shop on To Hieu Street (Cau Giay District, Ha Noi), buyers stood in line as soon as the municipal authority eased social distancing. Photo: Thach Thao\ Zing.
(This op-ed was published in Vietnamese language on Zingnews on 24 September 2021: https://bit.ly/3uoGf9m)
The Government announced a VND 26 trillion support package in July 2021 for employers and employees directly affected by the Covid-19 (Resolution 68/NQ-CP). This was an important first step to help people who have lost incomes from lockdowns and social distancing because of the recent wave of coronavirus infections.
Many people have been forced to reduce spending because of lost earnings. A recent survey by the Center for Analysis and Forecasting, supported by UNDP, found evidence of a big increase in transient poverty. Households have been forced to reduce consumption, even cutting spending on essential goods like food and milk for children.
The Government is concerned that a larger support package would have negative economic consequences, such as increasing the national debt or price inflation. The view of UNDP is that the Government can afford a larger package without these negative effects and should move quickly to offer additional cash assistance to people affected by lockdowns.
The Government measures public debt based on the debt-to-GDP ratio. This ratio, which must stay below 65 percent, was 56 percent at the end of 2020. The Government is focused on the numerator of this ratio or the amount of public borrowing. However, we also need to pay attention to the denominator of the ratio. When GDP growth slows down, the ratio falls more slowly or could even rise.
Private consumption usually comprises about 60 to 70 percent of economic growth. Last year, GDP growth slowed to 2.9% mostly because private consumption grew slowly due to social distancing measures, border closures and other factors related to the pandemic. For the first half of 2021, GDP growth accelerated to 5.6 percent as private consumption recovered. Yet we are likely to see a sharp reduction in private consumption in the second half of this year because of the spread of the Delta variant of Covid-19.
If economic growth slows down, the debt to GDP ratio will stop falling or may even rise. The best way to avoid this situation is for the Government to support private consumption through an additional cash assistance program.
A cash assistance program would increase private consumption by more than the amount of additional Government spending because of the multiplier effect.
For example, when we buy a pho at a restaurant, the money that we pay the restaurant is used to buy noodles and meat, and to pay the wages of the cooks, servers, and cleaners. But it does not end there. The cooks, servers and cleaners use the money that they earn at the restaurant to buy food and other necessities. And the butchers and noodle makers use the money they receive from the restaurant to pay their workers, and to pay the farmers that produce rice and meat.
Each successive round of spending increases total consumption. The multiplier effect measures the overall impact of consumption following the initial increase in spending. The multiplier for private consumption is greater than one, meaning every thousand VND spent on domestic goods and services increases domestic consumption by more than one thousand VND. For example, if the multiplier is 1.6, then an initial expenditure of VND 1,000 ultimately increases consumption by VND 1,600.
A larger cash assistance program achieves two objectives. It helps people who are suffering because of loss of income, and it raises GDP growth by increasing private consumption by more than the amount of the cash assistance program. If GDP grows faster, the debt-GDP ratio will decrease.
Another effect of accelerating the rate of growth is that the Government will collect more tax. When consumption declines, Government revenue also declines. Shops and restaurants pay less value added tax and companies pay less corporate tax. A cash assistance program that increases consumption and GDP growth partly pays for itself because it generates more tax revenue.
The Government also does not need to worry about price inflation. The economy is operating far below capacity because of the fall in private consumption. Lockdowns and social distancing force households to delay or cancel their consumption plans because they have lost income, or because shops are closed. The delayed or cancelled consumption is a form of forced or involuntary savings. This creates cash balances or company inventories, that are a net loss to aggregate demand. By borrowing this money and spending it on a cash assistance program, the Government mobilizes these idle resources for productive use.
Since there will be no shortages of labor or essential goods, the risk of inflation is very small.
UNDP proposes a cash assistance program equivalent to five percent of quarterly GDP, or about VND 77 trillion. The size of this support package would be similar to the levels provided by neighboring countries during the first round of lockdowns in 2020. Households receiving temporary assistance will spend a large proportion of the increased spending, adding to final demand and generating incomes for local businesses. Because of the multiplier effect, the total increase in private consumption would be much higher.
The quickest way to deliver support in affected areas in the form of an immediate cash benefit to children under six years of age on presentation of the child’s birth certificate, to pregnant women, to older people from 60 years of age and to people with disabilities. Administrative requirements could be kept to a minimum, and an electronic register of individuals could be compiled listing households and individuals who have received support.
Cash assistance could be delivered monthly or in one payment for the final three months of 2021, and the amounts would be linked to the minimum subsistence requirements in Decree 20/2021/NĐ-CP (replacing Decree 136/2013/NĐ-CP).
Some people will object that in a benefit scheme such as the one described above would give Government grants to non-poor households that do not need them. This is unavoidable but not a big problem because the assistance is temporary. Many wealthier families will not even bother to collect these relatively small amounts of money.
In any case, some leakage to non-poor households is small price to pay to achieve the larger goals of relieving suffering and sustaining economic growth./.