Macro and micro effects of fiscal policy – experience from the COVID-19 pandemic

Milan Deskar Škrbić & Darjan Milutinović, Public Sector Economics

Fiscal policy has taken centre stage in stabilizing economies hit by the pandemic shock in 2020 and 2021. Most governments responded to the disruptions caused by Covid-19 with various above-the-line measures (e.g., large expansion of health-related and other public expenditures and revenue deferrals), directly affecting economic activity via fiscal multipliers, and with below-the-line measures (e.g., equity injections, liquidity loans, debt assumptions) and guarantees, whose economic impact depended on how much they have been taken up and spent by targeted recipients. With respect to EU countries, total fiscal support to the economy from the beginning of the pandemic has ranged from around 7% of GDP in Croatia to above 45% in Italy (figure 1). If one focuses only on direct, above-the-line measures, these figures still indicate heavy fiscal support, ranging from 3.5% of GDP in Denmark to above 20% in Greece.

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