Governments around the world have acted decisively to protect their businesses and people from the economic disruptions caused by COVID-19. Measures include tax cuts, investment incentives, expanded social safety net benefits, direct payments to households and loans to businesses. The International Monetary Fund (IMF) estimates that governments spent almost US$14 trillion in 2020 to support their economies – and more fiscal stimulus is expected in 2021, most notably in the US.
In 2020, government support was the difference between survival and failure for many companies. As a result, the pandemic has reshaped the role of the government. A shift from a laissez-faire approach to a greater role for state intervention had already begun in many economies. But COVID-19 has dramatically accelerated this trend, driving many countries to scale up industrial policies, tighten foreign direct investment (FDI) regulations and impose export restrictions on critical medical supplies.
As vaccines are rolled out, the virus recedes and economies reopen, this direct government influence will start to wane. But government policies will continue to affect the economic structure of many key markets around the world. COVID-19 has motivated governments to seek greater self-reliance in strategic sectors, causing many countries to launch efforts to reshore manufacturing or diversify supply chains. And increasing geopolitical competition, especially in digital technologies, is also driving a shift toward more state interventionism in many countries. Finally, governments will use the COVID-19 crisis as an opportunity to push their economies toward more renewable energy and environmental sustainability.
Companies should be aware that greater state intervention in economies means the playing field is likely to tilt in favor of domestic firms. Greater trade and FDI barriers could also increase the cost of cross border operations for businesses. And climate policies as part of recovery packages are likely to accelerate the shift of business models toward being based on long-term value. With such high levels of government spending, companies should also anticipate tax increases in the medium term.