12 minute read 30 Jun 2021
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How the global financial crisis recovery set the stage for COVID-19 fiscal policy

By EY Global

Ernst & Young Global Ltd.

12 minute read 30 Jun 2021
Related topics Tax COVID-19 Tax controversy

With COVID-19 coming a decade after the global financial crisis, what can tax functions learn from the latter to plot a course post-pandemic?

In brief
  • There are plenty of clear parallels between the two crises, but the economic impact of the pandemic has been far more profound.   
  • Governments will eventually seek to recoup revenue lost during the COVID-19 pandemic, and to pay for the unprecedented scale of fiscal support measures.
  • To drive recovery, tax functions need to assess their entire global footprint, understand the compliance challenge and identify new opportunities. 

The effect of COVID-19 on the global economy, which contracted 4.4% during the year, has been transformative1. As a result, policymakers are focused  on trying to control the form a recovery will take.

In a recession, the best outcome is a rapid V-shaped recovery — although the initial hit prompts a sudden, steep downturn, once a response is in place, the economy soon returns to business as usual.

But for the majority of economies, the post-pandemic world hasn’t quite panned out like that. As the short-term support policies came, so the COVID-19 pandemic stretched on beyond the first few months and into a second year.

As soon as the depth of the crisis became apparent, many commentators sought to draw parallels with the last time the financial world was turned upside down — the global financial crisis (GFC) of 2008. The pandemic and the GFC appear similar — not least in the sudden and shocking existential uncertainty each brought.

“In both cases, governments lost a huge amount of money, they ended up in debt, and then they went looking for the money,” says Cathy Koch, Global Sustainability Tax Leader and EY Americas and Global Tax Policy Network Leader.

In each case, the stock market took an instant hit. And GDP fell around the globe, as did tax revenue, as people lost income and corporate profits collapsed. There were similarities in terms of lasting impact, too. Calculations from Oxford Economics and EY showed that the world suffered four quarters of negative growth as a result of the GFC. It forecast the same following the COVID-19 pandemic.2

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Chapter 1

A matter of scale

The COVID-19 economic impact is several times more severe than the global financial crisis.

Yet when one looks more closely at the nature of the two crises, key differences emerge — particularly the relative severity of the current upheaval. The Oxford Economics/EY research shows that in the trough year following the GFC, GDP fell 1.4%; compared to the 4.4% drop in the equivalent period after the COVID-19 pandemic hit.3

There are other, starker statistics. When International Monetary Fund (IMF) historical data is normalized and adjusted for inflation, it shows that government debt for advanced economies, taken as a percentage of GDP, is now almost as high as it was in the wake of World War II.4

And while homeowners and the banks bore the brunt of the fall-out for the global financial crisis, the COVID-19 pandemic has been nuanced — striking some businesses, like retailers and the service trade, heavily, while leaving others untouched or thriving. Yet, while nuanced, that impact has also been widespread — neither China nor India experienced any single quarters of negative growth during the GFC; they have following the COVID-19 pandemic.5

The reaction from policymakers bears comparison too. The global response to the GFC was almost equally split between fiscal and monetary stimulus. While widespread use of quantitative easing and other monetary tools injected money and credit back into the system, which had been rocked by the collapse of the banks, some 56% of the total fiscal stimulus was rooted in tax measures, according to the OECD.6 This cost trillions of dollars — and was swiftly followed by austerity programs to pay for it.

The nature of the COVID-19 pandemic, meanwhile, has prompted a fiscal response that’s unprecedented in its scale and complexity. Here, the assumption was that money and credit aren’t so much of an issue — economic activity is simply on pause, and once it opens up again it will do so with force, as consumers and businesses act on pent-up demand.

Governments were forced onto an emergency footing, providing immediate direct fiscal stimulus to support national lockdowns, often paying workers to stay home and offering company subsidies on an unprecedented scale.

Another significant difference is that, as the pandemic was a public health crisis — and one that followed 10 years of the aforementioned austerity — there has been less pressure to keep budgets balanced. Many governments have also learned from the previous crisis — they’re proving much more willing to spend, and to borrow in order to do so.

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Chapter 2

Measuring support and stimulus

During the financial crisis, economists said go big and politicians said keep stimulus limited. Few held back during the pandemic.

In 2008, Global Sustainability Tax Leader Koch was Chief Tax Counsel on the United States Senate Committee on Finance, and worked on the development of key stimulus bills.“We were told not to go over a certain amount of money,” she says. “While the economists were all telling us to spend more, politicians were saying to spend less. Now you see central bankers, who’ve learned from the last crisis, saying maybe we should just spend more immediately.”

Koch also highlights how many of the stimulus measures the US government used in the wake of the GFC are being employed this time too: employee retention incentives; tax payment deferral; accelerated depreciation measures; loans and guarantees; conversion of deferred tax assets into tax credits; and more flexible loss carry backs.

In the current crisis, the scale is bigger. Budget deficits have sky-rocketed around the globe. In the wake of the pandemic, G20 debt levels are approaching the highest in modern history, surpassing 100% of GDP for many countries. Government revenues have fallen, while expenditures have risen sharply. After the GFC, that spending reached 85% of GDP. Following COVID, it hit 103%.7

Koch sees the US as an illustrative example. “According to the Bank of America, the US spent 14% of its GDP on stimulus in the immediate wake of the GFC,” she says. “The latest figures for the pandemic show that stimulus spend is now at 51.8%. While the global stimulus response of $33.3 trillion represents 38% of global GDP.”

Charting the way

So how can we expect the recovery effort to play out? The massive short-term interruption to economic activity, caused by lockdowns, closed borders and other restrictions of movement, doesn’t necessarily equate to a fundamental change in long-term demand.

As mentioned, some areas have been deeply affected — the hospitality, travel and retail industries, for example. Many of these will take time to recover. Other sectors, such as technology, telecoms and financial services have thrived. Hence the post-pandemic recovery in many economies is being described as K-shaped — incredibly challenging for some companies and sectors, whereas for others it’s driving demand.

For certain economies, meanwhile, it seems a V-shaped recovery is still possible. In the US, for example, the success of its stimulus measures has led to suggestions that its recovery has defied expectations and bounced back.8 In January 2021, JP Morgan  stated that China’s V-shaped recovery was already “complete.”9

The other unique feature of current events is that the crisis itself may have fundamentally changed how companies operate in the future.

“The pandemic effectively proved that many types of businesses can carry on working remotely,” says Chris Sanger, EY Global Government and Risk Tax Leader. “What does that do for the return to work? What does it mean for the future of city-center working, and for all the service businesses that spring up around it? These are big questions, and it’s all going to take a while to work its way through.”

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Chapter 3

The role of tax policy

Tax increases – and more robust tax law enforcement – is coming. Get engaged to understand the impact.

Then there’s the matter of those record deficits. While the pandemic may seed different pressures to those sparked by the GFC, those budgets will need to be balanced at some point. In the next two or three years, perhaps, some predict a return to austerity, this time with the onus falling on higher taxes rather than cuts to already drained public services. Indeed, 51% of respondents to the recent EY Tax Risk and Controversy Survey expect higher direct taxes in the coming three years, with that figure rising to 66% in the UK and 93% in the US.

Then there’s tax collection enforcement. In the years since the GFC, governments’ revenue collection capabilities and methods have become much more robust. Thanks to subsequent changes to legislation, there’s a greater emphasis on transparency, and tax enforcement has become far more effective, with governments increasingly using technology tools to ensure compliance and recoup much-needed revenue.

“Compliance is a really good way to squeeze blood out of a stone,” says Koch. “In 2008, we had a crisis, started to recover, and a couple of years later people started getting together to make sure every penny was taxed. And that’s what’s going to happen again — you wait a couple of years until things start recovering and then you start squeezing. It’s just a question of who’s going to pay the bill. But you always see the same themes.”

By way of identifying those themes now, Koch points to the US’s global intangible low-taxed income (GILTI) tax and how US treasury secretary Janet Yellen recently came out in support of BEPS 2.0, and the proposals for a global minimum corporate tax.10

Indeed, the majority of countries are facing the need to shore up their funding after such significant spend. And the US won’t be the only nation to re-examine how it approaches that funding. All of which suggests companies and tax functions can expect to face a heavy workload.

Learn from the past, focus on the present

There’s certainly plenty of value in organizations looking back at the previous crisis as they navigate out of this one. But the real focus should be paying attention to the potentially seismic changes going on right now — changes that may affect everything from staffing locations to supply chains, and have an impact on tax across the board.

“It’s a complicated environment, because each country has its own interests and its own tax system, and will have its own fiscal path forward, even though countries are all responding to the shared circumstances of the global crisis,” says Barbara Angus, EY Global Tax Policy Leader. “The global tax changes contemplated in the ongoing G20/OECD Inclusive Framework project, which began well before the pandemic, do involve a greater degree of coordination and cooperation than has existed on tax matters to date, but these proposals are not estimated to result in a substantial increase in overall corporate tax revenues. So even as consensus develops in the Inclusive Framework on these changes, each government also will be looking beyond this global project to the design and implementation of other aspects of its own tax system for potential sources of revenue. So tax executives will need to be watching activity on both tax policy and tax administration in all the countries that are relevant to their business footprint, and preparing for change on multiple fronts simultaneously.”

Companies should extend that attentiveness to the carrot as much as the stick. Note the primary role of tax credits, cash grants and other incentives in recovery packages now being offered around the world.

In the wake of the GFC, smart tax departments took stock of their overall footprint and identified which incentives were being offered in the various different countries in which they had a tax presence. They then worked out whether responding to those incentives was in keeping with their overall mission and vision for the business.

The same thing will apply post-pandemic. Those companies that are able to adapt themselves appropriately to the new opportunities will be the quickest to prosper.

“This isn’t a situation where the tax tail wags the dog — where companies see an incentive and just go for it,” says Sanger. “Best-in-class tax departments consider this from a far more strategic perspective. They make sure they’re aware of these opportunities, and they take them into the broader business as part of a holistic decision-making function.”

All of which suggests the tax function has a particularly strong role to play in the recovery phase. With governments using tax as a tool, not just to recoup income, but to incentivize behavior — note the rise of Pigouvian taxes such as carbon levies — the tax function will be a critical player in helping the company steer its way through. And in a world where businesses are now far more global and digitalized than ever, they need to know which compliance demands and support mechanisms are relevant to them, beyond their headquarter country and across their global footprint.

There is still a lot of uncertainty as we enter the middle of 2021, and there are no guarantees as to how and when economic activity will universally return to normal, let alone what the recovery will actually look like. Yet one thing is clear — it’s essential for business to pay attention to policymakers as they start to pull together their measures for recovering sovereign finances.

And as Koch is at pains to point out, this is no time to be passive. “To sit on the sidelines and wait for it to happen is not very wise,” she says. “There are always collateral victims in any type of legislation — especially with taxation, which is a huge machine.

“So business really has to help the people who are designing the policy, to make them aware of the disparities or the disincentives that are created by their tax systems. If you don’t offer yourself as a credible, helpful resource, how are policymakers supposed to know the impacts to companies like yours? Be aware. Be involved. This is critical to business.”

  • Action points for tax and finance functions

    • Assess what the future looks like for your business. You can’t assume things will return to how they were pre-crisis. That means new challenges; but there will be fresh opportunities too.
    • Work out what you can change. Where should your employees be located? What’s the best mix of remote and flexible working, and meeting face to face? Would your supply chains benefit from moving closer to the market?
    • Monitor developments in tax policy. Cash-strapped governments are likely to put greater effort into enforcing their tax rules to ensure full collection, potentially leading to greater controversy.
    • Get a handle on how each of your locations is recovering. Activity in currently quiet areas may explode once again with pent-up demand, so be ready to capitalize.
    • Know your existing tax footprint. And use your knowledge of the shifting tax picture to inform whether your company’s strategic choices are still valid.
    • Engage with policymakers. Those making changes to the tax regime must understand the impact they will have on the potential for local investment, employment and growth.


With the COVID-19 pandemic moving well into its second year and the economic recovery beginning to take hold in some jurisdictions, governments are starting to think about recouping lost revenues. The fiscal response to the global financial crisis a decade ago suggests that tax function should pay close attention to changes that may come.

About this article

By EY Global

Ernst & Young Global Ltd.

Related topics Tax COVID-19 Tax controversy