government intervention in the economy essay

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• Government Intervention: Examples, Reasons, and Impacts

Updated on April 10, 2022 by Ahmad Nasrudin

What’s it : Government intervention refers to the government’s deliberate actions to influence resource allocation and market mechanisms. It can take many forms, from regulations, taxes, subsidies, to monetary and fiscal policy. In some cases, the government also sets maximum and minimum price limits on the market.

Government intervention and the economic system

Broadly speaking, the significance of the intervention depends on the economic system adopted by a country.

Under a  command   economy system , government intervention is highly significant. The government determines what is best for the economy and society. It allocates resources and determines the production and distribution of goods.

The private sector’s role is minimal or even zero. Under a command economy system, the market mechanism does not work.

In contrast, a  free-market economy  operates in reverse compared to a command economy. The free market system emphasizes the minimization of intervention. The private sector plays a significant in the allocation of economic resources.

The market operates freely through a supply and demand mechanism. This mechanism directs the allocation of resources more efficiently than the command economy system. Under this system, the government’s role is usually limited to enforcing rules to recognize and protect private property ownership.

Furthermore, under a  mixed economy system , interventions are more diverse than in a market economy, but not as extreme as a command economy. The government has a role, and so does the private sector.

The significance of the roles of the government and the private sector also varies between countries. Some countries, such as China and Cuba, are more inclined towards a command economy. The government plays a significant role. Meanwhile, in countries such as the United States and the United Kingdom, the private sector plays a more dominant role in managing economic resources.

Reasons for government intervention in the economy

The government intervenes in the economy with several objectives, such as:

Redistributing income and wealth.  For example, the government launched various welfare programs such as unemployment insurance, health, and free education. It sustains the quality of life of those who are economically disadvantaged. Taxation is also another avenue for redistribution of income.

Providing public goods . Examples of public goods are public parks, infrastructure, and national defense. The private sector often does not want to provide it because it is unprofitable. Hence, the government took a role.

Promoting fair competition . Through antimonopoly regulations, the government prevents unfair competition practices such as collusion and predatory pricing.

Securing and spurring the domestic economy.  For example, the government set trade barriers to protect domestic industries from competing imported products. So, they continue to grow and create more jobs.

Protecting people . For example, the government launched a consumer protection policy, quality requirements, occupational safety, and the environment.

Changing consumer behavior . Intervention is one way to reduce the impact of negative externalities. For example, the government could increase taxes on products such as alcoholic beverages and tobacco.

Preserving the environment . Without government regulations and policies, companies are more likely to ignore external costs to the environment. They overexploit natural resources or allow waste to flow into the environment without further treatment. Such practices certainly jeopardize the long-term sustainability of the economy.

Achieving macroeconomic goals.  The four macroeconomic goals are sustainable economic growth, full employment, low inflation, and balance of payments equilibrium.

Ways of government intervention 

Government intervention takes many forms, from the micro to the macro level. In this article, I try to group them into the following categories:

Economic policy

Regulations, price controls.

The economic policy falls into two main categories:

Supply-side policy

• Demand-side policy

The government designs supply-side policies to influence aggregate supply in the economy. Typically, these policies focus on increasing production efficiency, either in product markets or factor markets (e.g., labor market).

In the product market, the government promotes competition by launching antimonopoly, deregulation , and privatization policies. Competition forces producers to be more efficient and innovative to stay in the market and make a profit.

Furthermore, in the labor market, the government is trying to improve labor mobility and quality. That is through various programs such as education, training, and reduction of union power.

Demand-side policies

Demand-side policies consist of fiscal policy and monetary policy. The government is responsible for the fiscal policy through changes in its spending and taxes. Meanwhile, monetary policy is under the responsibility of the central bank or monetary authority. It seeks to influence the money supply in the economy. Both affect the economy through their effect on aggregate demand.

To stimulate economic growth, the government and the central bank adopted expansionary policies. That is usually during a weak economy, such as an economic recession. The options are to:

• Increase government spending
• Lower taxes
• Cut policy rates
• Open market operations through central bank purchases of government securities
• Lower the reserve requirement ratio

Meanwhile, to avoid high inflationary pressure, both implement a contractionary policy. High inflation endangers economic stability and can lead to hyperinflation. Among the options for implementing a contractionary policy are:

• Reducing government spending
• Lifting taxes
• Raising the policy rate
• Open market operations by selling government securities
• Raising the reserve requirement ratio

The government ensures that economic activities run healthily. Several regulations aim to encourage business activity. While others, to control business activities and avoid unwanted results or negative externalities.

There are many variations of government regulations, and each affects economic activity in different ways. The following are several categories of government regulations:

Employment . The government issues rules, regulations, and laws regarding wages, fair recruitment, and workforce health and safety.

Environment . For example, the government launches various regulations regarding the environmental impact of company operations on the surrounding environment, such as environmental safety standards and waste management.

Consumer protection . The focus is to protect consumers from unfair practices related to price rules, health and safety standards, and product descriptions.

Competition . It is in the government’s interest to promote fair competition. These types of rules and regulations include antitrust and merger and takeover regulations. This category includes deregulation, namely eliminating regulations or restrictions such as limits on foreign investors’ share ownership.

Information and reporting . An example of these rules and regulations are accounting standards and the security of consumers’ personal information.

Taxes are the main source of government revenue. The government uses it to finance several programs and to pay off debts. In addition to government operations, the government uses taxes to increase economic capital by providing public goods such as roads, bridges, trains, public parks, and national defense. This economic capital is vital for increasing the production capacity of the economy in the long run.

The government collects taxes from taxpayers, which come from the household and business sectors. The government can impose it directly on taxpayers, such as through income tax and profit tax. Or, it is indirectly as in sales tax and value-added tax.

Tax is a means of redistribution of income. Also, taxes affect the financial behavior of businesses and households. For example, an increase in taxes reduces household disposable income . Therefore, households tend to spend less on goods and services.

Under a price control policy, the government sets price limits for certain goods and services. The two forms of price control are:

Price ceiling

Price floor.

Price ceilings limit the maximum prices for goods and services. Suppliers cannot charge a price higher than that price. The purpose of a price ceiling is to protect consumers by ensuring it is affordable to as many consumers as possible. An example is the rental price of residential property.

To be effective, the government sets a price ceiling below the free-market equilibrium price.

Setting a price ceiling has the following implications:

Bringing up the shortage . Due to lower prices, more consumers are asking for it. Conversely, lower prices make fewer producers willing to supply. Therefore, the market will experience excess demand (shortage), where the quantity demanded exceeds the quantity supplied.

Less efficient and decreasing economic surplus.  Economic surplus is the sum of consumer surplus and producer surplus. Due to lower prices, the producer surplus will decrease. They get less profit. Meanwhile, even though consumers get lower prices, however, they face a shortage. Supply decreases because producers supply fewer goods.

Rationing . Because of the shortage, consumers have a more challenging time finding goods. Suppose it goes on for a long time. In that case, the government may need to ration goods to ensure their availability for as many consumers as possible.

Raising a black market.  The black market thrives on shortages. The producer may sell at a higher than the ceiling on the black market. Likewise, some consumers who already own goods will sell back to other consumers at a higher price to profit.

It is the minimum price that can be charged for a good or service. Its purpose is to protect suppliers of goods or services.

The most quoted example of a price floor is the minimum wage. In this case, individuals act as suppliers of labor services, while companies are buyers. With the minimum wage, workers make enough money from their jobs to meet their basic needs.

To be effective, the government sets the price floor above the equilibrium price. Because prices are higher, more and more suppliers are willing to supply goods and services. On the other hand, the quantity demanded is less because the price becomes more expensive for consumers. As a result, the market will experience an excess supply, where the quantity supplied exceeds the quantity demanded.

The government also provides subsidies to households or companies. Examples include fuel oil, public health care, education, research and development, fertilizers, and raw materials subsidies. Soft loans also fall into this category.

The provision of subsidies reduces the burden on households. They spend less money on these goods and services, enabling a better standard of living.

For companies, subsidies reduce production costs. It stimulates them to produce more. Also, they can sell at a lower price, making the product more competitive in the market.

Disagreements among economists

Some economists view government intervention as necessary. However, they are still arguing about how much the government should intervene and how they should intervene. In macroeconomics, both gave rise to schools of thought: Keynesian economics and Neoclassical economics.

Keynesian views that the government should intervene. When there is a disequilibrium, the economy will not move towards the new equilibrium by itself.

Take the case when the economy is depressed. Among the solutions to getting out of the economic depression is stimulating government spending, which is a part of aggregate demand.

As we know, aggregate demand consists of household consumption, business investment , government spending, and net exports. Net exports are beyond the control of the domestic economy because they depend on global economic conditions. Thus, the main options for stimulating aggregate demand are through consumption, investment, and government spending.

But, during the economic depression, business profits worsen as demand falls. Likewise, household income drops due to high levels of unemployment. Therefore, it is almost impossible to increase consumption and investment during the depression.

Thus, a more sensible option would be to increase government spending. The budget depends more on discretionary government policies than on economic conditions.

In contrast, Neoclassical economists view government intervention should be minimal. The market mechanism will work and direct the economy towards equilibrium. According to Neoclassical economists, supply and demand are the main factors that determine goods, output, and income in an economy. So, government intervention will only make the economy no better.

Negative effects of government intervention 

Although the aim is positive to build the economy and society’s prosperity, interventions often result in unintended consequences. The following are the opposing sides of government intervention in the economy:

Government failure . It happens when the intervention doesn’t produce better results. The market becomes inefficient in allocating resources. The government may also consider short-term effects rather than the long-term. For example, trade barriers protect domestic industries. But, it also disincentives producers to be more innovative and more efficient. Likewise, in the case of production subsidies.

Increased costs . For example, companies have to spend more money to meet product safety and health standards. They also bear the cost of further processing the production waste.

Fewer options . In an extreme case is the command economy. The government decides what to produce and how to distribute it.

Discrimination policy.  Intervention may be beneficial for some, but detrimental for others. Take competition policy, for example. The government may favor state-owned companies over private companies. Likewise, in a bailout, the government used tax revenues to save the big banks instead of all the banks.

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Why Do Governments Intervene?

• How Do Governments Respond?

The Federal Reserve System

• Achieving Financial Stability
• Government Policy FAQs

The Bottom Line

• Government & Policy

What Impact Does Economics Have on Government Policy?

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

Economic conditions often inform the policy changes that governments elect to enact. Specifically in the United States, government policy has always had a large amount of influence on economic growth, the creation of new business entities, and the success of financial markets.

In the broadest sense, a country's economic activity reflects what people, businesses, and governments want to buy and what they want to sell. Because the U.S. has a capitalist economy that relies on the principles of a free market, theoretically, it is primarily the decisions of consumers and producers that mold the economy.

Key Takeaways

• Economic conditions often inform the policy changes that governments elect to enact.
• In the U.S., government policy has always had a large amount of influence on economic growth and the creation of new business entities.
• For those in political power, having a track record of economic growth is often an important consideration (especially if they are in a position of seeking re-election).
• To ensure strong economic growth, there are two main ways that the federal government may respond to economic activity: fiscal policy and monetary policy.
• In the U.S., the Federal Reserve System directs the country's monetary policy.

The government may decide to regulate some aspects of economic activity in order to engineer economic growth or prevent negative economic conditions in the future. In general, a government's active role in responding to and influencing the economic circumstances of a country is for the purpose of preserving and furthering the economic interests of the general public.

For those in political power, having a track record of economic growth is often an important consideration (especially if they are in a position of seeking re-election). In the U.S., many studies have shown that the economy is a major factor that affects how people vote (specifically in the U.S. presidential election). Strong economic growth typically translates to high job creation, stronger wage growth, better financial market performance, and higher corporate profits.

How Do Governments Respond to Economic Activity?

To ensure strong economic growth, there are two main ways that the federal government may respond to economic activity: fiscal policy and monetary policy .

Monetary Policy

One of the most common ways that a government may attempt to influence a country's economic activities is by adjusting the cost of borrowing money. This is most often done by lowering or raising the federal funds rate , a target interest rate that impacts short-term rates on debt such as consumer loans and credit cards. The Federal Reserve increases the federal funds rate to constrict economic growth and decreases the federal funds rate to encourage economic growth.

Another form of monetary policy is the act of the Federal Reserve buying and selling government securities. When the Fed buys a security from a bank, it increases the money supply by injecting funds into that bank. Alternatively, it can sell securities to remove cash and decrease the money supply.

Monetary Policy Example

In response to the COVID-19 pandemic, the Federal Reserve quickly reduced the federal funds rate to 0%. By setting prevailing interest rates very low, the Federal Reserve attempted to support economic activity, maximize employment, and meet price stability goals.

Fiscal Policy

The government may also enact policies that adjust spending, change tax rates, or introduce tax incentives. In regard to government budgets, the government identifies whether or not it wants to spend more money than it anticipates collecting. This process of evaluating public spending aims to promote economic prosperity or cool an overheated economy.

Instead of focusing on how the government spends money, common fiscal policy revolves around how the government collects money. Offering tax incentives, additional tax credits, or lowering tax rates decreases the economic burden on citizens and promotes economic growth. Striking down favorable tax laws or increasing taxes slows economic activity.

Fiscal Policy Example

In response to the COVID-19 pandemic, the Federal government awarded economic impact payments (i.e. stimulus checks) to qualifying Americans. The government directly sent eligible individuals money to promote economic activity and encourage household spending.

Fiscal and monetary policies are both intended to either slow down or ramp up the speed of the economy's rate of growth. This, in turn, can impact the level of prices and the employment rate in the country. However, there are subtle differences between these two types of government action.

Differences Between Government Policies

Change in the money supply or how easy credit is to obtain

Adjustment in federal funds interest rates or money supply

Set by Central Bank

Heavily independent of the political process

Impacts debt industries like housing market

Change in how the existing monetary supply is utilized

Adjustments in government spending and tax rates

Set by Federal Government

Heavily integrated with political process

Impacts government budgets/net deficits

In the U.S., the Federal Reserve System directs the country's monetary policy. The Federal Reserve System—also called "the Fed"—is the central bank of the United States. Established in 1913 by Congress, the Fed controls the money supply and actively uses policy to respond to and influence economic conditions.

The Fed adjusts the interest rate that banks charge to borrow from one another. (This cost is then passed onto consumers.) The Fed may lower the interest rate to keep borrowing cheap, ensure that credit is widely available, and boost consumer (and business) confidence. Conversely, the Fed may decide to raise interest rates in a strong economy, or in response to inflation concerns—the increase in prices that occurs when people have more to spend than what's available to buy.

In the two ways governments can intervene in the economy, you'll note that monetary policy is set by the Federal Reserve, an independent entity technically not part of the Federal government. On the other hand, fiscal policy requires political intervention and majority approval (for items not issued by executive order by the President).

Achieving Financial Stability in the U.S. Economy

Prior to the creation of the Fed in 1913, the U.S. had experienced several severe economic disruptions as a result of massive bank failures and business bankruptcies. As an institution, the Fed was tasked with ensuring financial stability in the U.S. economy.

After the Great Depression , the greatest threat to the stability of the U.S. economy was recessionary periods: periods of slow economic growth and high unemployment rates. In combination, these two factors created a sustained period of decline in the gross domestic product (GDP). In response to this, the government increased its own spending, cut taxes (in order to encourage consumers to spend more), and increased the money supply (which also encouraged more spending).

Beginning in the 1970s, a different economic reality emerged. This expansionary economy with substantial money supply growth led to a sustained period of a high level of inflation. In response to these economic factors, the U.S. government started focusing less on combating recession and more on controlling inflation. Thus, the government enacted policies that limited government spending, reduced tax cuts, and limited growth in the money supply.

At this time, the government also shifted away from its reliance on fiscal policy—the manipulation of government revenues to influence the economy. The fiscal policy did not prove effective at addressing high levels of inflation, high levels of unemployment , and vast government deficits. Instead, the government turned to monetary policy—controlling the nation's money supply through such devices as interest rates—in order to regulate the overall pace of economic activity.

Since the 1970s, the two main goals of the Fed have been to achieve maximum employment in the U.S. and to maintain a stable inflation rate. This dual mandate is difficult to achieve; by combating one of the goals, it becomes more difficult to fight the other.

While outside events may influence economic activity, governments use economic means to enact changes as they see fit. This may include changes to tax policy, adjustments to the federal funds rate, fluctuations in the money supply, or alternations to government spending.

Should the Government Intervene in the Economy?

Whether or not the government should intervene in the economy is a deeply-rooted philosophical question. Some believe it is the government's responsibility to protect its citizens from economic hardship. Others believe the natural course of free markets and free trade will self-regulate as it is supposed to.

Why Might the Government Intervene in the Economy?

The government has an inherent interest in protecting the well-being of its citizens. Due to prevailing conditions in the world, the government might see fit to enact certain legislation to preserve the quality of life for its citizens. The government might also enact legislation to promote economic well-being and equity across different socioeconomic classes.

What Are Some Ways the Government Intervenes in the Economy?

The government has two primary ways of interacting with the economy. Through monetary policy, the government controls prevailing interest rates and makes obtaining debt easier or harder. Through fiscal policy, the government controls spending levels and how to allocate resources.

Keynesian economic theory holds that governments should hold their citizens out of a recession. Governments do this by enacting monetary and fiscal policies. By having a central bank (i.e. the Federal Reserve), the United States has the ability to manipulate economic policy in an attempt to intervene when appropriate.

U.S. Department of State. " U.S. 2022 Midterm Elections: Role of the Economy in Elections ."

Sage Publications. " Economic Perceptions and Voting Behavior in US Presidential Elections ."

Federal Reserve Board. " Monetary Policy Principles and Practice ."

Federal Reserve Board. " Federal Reserve issues FOMC statement, March 15, 2020 ."

Internal Revenue Service. " Economic Impact Payments: What You Need to Know ."

Federal Reserve Board. " What Is the Purpose of the Federal Reserve System? "

Federal Reserve History. " The Great Inflation ."

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9 Government Intervention in the Economy

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• Published: September 1998
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Discusses the attitudes of Western European publics towards economic liberalism and economic interventionism during the past few decades. While beliefs about the desirability of state intervention in the economy, and of state ownership of public assets are central to modern political ideologies, there is scant evidence that interventionism and liberalism constitute opposite positions in the public mind. Questions of whether governments should practice economic interventionism, or whether assets should be removed into government ownership, tend to be answered not in terms of philosophical principle, but in terms of whether the government is felt to be worthy of the powers entrusted to it. Interventionism tends to be supported by those who lose out under laissez‐faire economies, by women, by young people, and by old people. These tendencies can be explained by the fact that, on the whole, it is middle‐aged men who tend to profit most from the liberal capitalist system.

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Government Intervention in Markets

Governments intervene in markets to try and overcome market failure. The government may also seek to improve the distribution of resources (greater equality). The aims of government intervention in markets include

• Stabilise prices
• Provide producers/farmers with a minimum income
• To avoid excessive prices for goods with important social welfare
• Discourage demerit goods/encourage merit good

Forms of government intervention in markets

• Minimum prices

Maximum prices

• Minimum wages
• Nudges/Behavioural unit

Minimum Prices

This involves the government setting a lower limit for prices, e.g. the price of potatoes could not fall below 13p.

The minimum price could be set for a few reasons:

• Increase farmers incomes
• Increase wages
• Make demerit goods more expensive. For example, a minimum price for alcohol has been proposed.

Diagram Minimum Price

A minimum price will lead to a surplus (Q3 – Q1). Therefore the government will need to buy the surplus and store it. Alternatively, it may impose quotas on farmers to decrease the quantity of the good put onto the market.

Problems of minimum prices

• It could be costly for the government to buy the surplus
• A minimum price guarantee acts as an incentive for farmers to try and increase supply. As an unintended consequence, the minimum price encourages more supply than expected and the cost for the government rises. This happened with the EEC Common Agricultural Policy.
• To ensure minimum prices, the government may have to put tariffs on cheap imports – which damages the welfare of farmers in other countries.

Maximum Price

This involves putting a limit on any increase in price e.g. the price of housing rents cannot be higher than £300 per month.

Maximum prices may be appropriate in markets where

• Suppliers have monopoly power and are able to generate substantial economic rent by charging high prices
• The good is socially important – e.g. good quality housing is important to labour productivity and a nations’ health.
• Demand is price inelastic because the good is necessary for maintaining minimum standards of living.

Diagram Maximum Prices

The Maximum price will be set below the equilibrium. This makes sure the price is less than the market clearing price.

• However, the problem of a maximum price is that there will be a shortage. At Max Price, Demand is greater than supply. (Qe-Q1) This leads to queues and consumers unable to buy.
• This will encourage the operation of black markets.
• Therefore the government will have to ration the goods or increase supply

If supply and demand are very inelastic, then a maximum price may have little adverse impact on creating shortages. For example, if supply housing for rent is very profitable, then a maximum price will not stop landlords putting the house on the market.

• Buffer Stocks

Agriculture suffers from various problems. These include:

• Fluctuating Prices
• Uncertainty leads to lack of income
• Low-Income elasticity of demand
• Positive Externalities of Farming

Therefore the government may feel there is a case to intervene and stabilise prices. A buffer stock involve a combination of minimum and maximum prices. The idea is to keep prices within a target price band.

This is a different kind of government intervention. It is a government policy to influence demand indirectly. For example, putting cigarettes behind closed covers – makes it harder or less enticing for people to buy.

The government may also place flashing speed limit signs to give a smiley face to drivers under the speed limit, but an unhappy face to drivers exceeding the speed limit.

See: nudges

Tax is a method to discourage consumption of certain goods. For example, taxes on demerit goods – goods with negative externalities. Taxes both discourage consumption and raise revenue for the government.

In the above example, the tax moves output to Q2

Problems of tax

• Demand may be inelastic
• Hard for the government to know external cost and how much to tax
• May encourage tax evasion – e.g. rubbish tax can encourage fly-tipping

The government may subsidise goods with positive externalities (for example, public transport or education).

In the above example, a subsidy shifts output to 120 (where SMB = SMC) so it is more socially efficient.

Problems of subsidies

• Cost to government
• Subsidies may encourage firms to be inefficient because they can rely on government aid.
• Government intervention in the labour market

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Economic impact of government interventions during the COVID-19 pandemic: International evidence from financial markets

The outbreak of COVID-19 pandemic came as a rare, unprecedented event and governments around the globe scrambled with emergency actions including social distancing measures, public awareness programs, testing and quarantining policies, and income support packages. In this paper, we examine the expected economic impact of government actions by analyzing the effect of such actions on stock market returns. Using daily data from January 22 to April 17, 2020 from 77 countries, we find announcements of government social distancing measures have a direct negative effect on stock market returns due to their adverse effect on economic activity, while an indirect positive effect through the reduction in COVID-19 confirmed cases. Government announcements regarding public awareness programs, testing and quarantining policies, and income support packages largely result in positive market returns. Our findings have important policy implications, primarily by showing that government social distancing measures have both positive and negative economic impact.

1. Introduction

The outbreak of highly contagious COVID-19 pandemic came as a surprise event with unprecedented uncertainty with respect to how deadly disease really is and whether and when can we get a vaccine. In response, governments across the world scrambled with emergency actions, such as lockdowns, travel restrictions, testing and quarantining, and economic packages. The main purpose of these actions was to ensure social distancing among people to contain the spread of the disease on the one hand, while to minimize the adverse economic impact on the other hand. However, these actions generated additional uncertainty regarding their effectiveness and impact. For instance, lockdowns, though could be effective in reducing new infections, increased the economic distancing as well thereby hurting the jobs and incomes of tens of millions of people. Despite the fact that long-term effect of these government actions yet has to be seen, in this paper, we examine their expected impact by analyzing the stock markets’ reaction to these actions. Stock markets, which include the pool of sophisticated and opinionated investors, provide an incentivized survey of future expected outcomes. Wagner (2020) argues stock markets provide particularly useful information in fast evolving, complex situations.

Particularly, we examine stock markets’ reaction to three types of government actions including social distancing measures, containment and health response, and income support packages. Social distancing measures include the closure of schools, workplaces, parks, public transport, among others. Containment and health response is mainly about government public awareness campaigns and testing and quarantining policy. Income support packages include the government financial assistance to households in the form of direct cash transfers or relief in debt or other payments for utilities.

We postulate that these government actions have both direct and indirect effects on stock market returns. For the direct effects, social distancing measures might have direct negative effect on stock market returns by adversely affecting economic activity. On the contrary, government containment and health response, and income support packages are likely to lead to positive market reaction by enhancing the investors’ confidence and reducing the adverse economic effects due to the disease.

The indirect effect of these government actions channels through the reduction in the intensity of COVID-19 outbreaks. Comprehensive and strict government actions, such as stringent social distancing measures, aggressive testing and quarantining policy and generous government income support programs, might reduce the rate of new infections. Building on the recently emerging literature which reports that stock markets around the world have reacted to COVID-19 pandemic with strong negative returns ( Al-Awadhi et al., 2020 , Ashraf, 2020a , Baker et al., 2020 , Ramelli and Wagner, 2020 , Zhang et al., 2020 ), we argue that if strict government actions reduce the intensity of local outbreaks, then they weaken the negative market reaction to the growth in COVID-19 confirmed cases.

To empirically examine the above hypothesized relationships, we use a panel dataset of daily stock market returns, government responses and the growth in COVID-19 confirmed cases from 77 countries over the period January 22 to April 17, 2020. After controlling for country characteristics and systematic risk due to international factors, we find that social distancing measures have direct negative impact on stock returns, while an indirect positive impact by reducing the growth rate of new confirmed cases. Containment and health policies and income support packages have direct positive impact on stock returns, but do not affect stock returns indirectly through the reduction in growth in confirmed cases. Together, our results provide evidence that stock markets have priced in the impact of government actions. Results remain robust against alternative sample compositions and alternative estimation methods.

We offer at least two important contributions to the existing literature. First we add to the emerging literature which examines the impact of COVID-19 on financial sector outcomes. In this regard, recent literature surveys by Goodell (2020) and Yarovaya et al. (2020) suggest that COVID-19 pandemic might have important impact on the functioning of financial sector and is a promising research domain. Focusing on more specific issues, Corbet et al. (2020a) examined the impact of being named “corona” on stock returns and find that the companies with ‘corona’ word in their names experienced strong negative hourly returns and an exceptionally large increase in hourly volatility when COVID-19 pandemic was announced. Likewise, Sharif et al. (2020) find that the pandemic has a greater effect on the US geopolitical risk and economic uncertainty than on the US stock market. Debating the safe heaven properties of different assets, Corbet et al. (2020b) , Conlon and McGee (2020) and Conlon et al. (2020) conclude that crypto assets largely do not act as hedges, or safe havens, but perhaps rather as amplifiers of contagion during the bear market amid the pandemic. On the other hand, Goodell and Goutte (2020) analyze the Bitcoin reaction to daily COVID-19 world deaths and show that Bitcoin is a safe haven asset. Moreover, Sharif et al. (2020) find gold and soybean futures as having strong safe-haven role during the COVID-19 outbreak. In this regard, we examine how stock markets reacted to government actions aimed to control the pandemic. Besides, we also examine how government actions interact with local COVID-19 outbreaks to affect the stock market returns.

Second, we complement the recent studies which examine the impact of COVID-19 on financial markets ( Al-Awadhi et al., 2020 , Ali et al., 2020 , Ashraf, 2020a , Baker et al., 2020 , Haroon and Rizvi, 2020 , Ramelli and Wagner, 2020 , Schell et al., 2020 , Zhang et al., 2020 ). For instance, focusing on stock market volatility, Baker et al. (2020) compared the reaction of US stock market to various infectious diseases and found that COVID-19 has inflicted the unprecedented volatility. Likewise, Zhang et al. (2020) examined the volatility of ten stock markets in the countries with most confirmed cases over the months of January and February, 2020, and found that volatility increased substantially in February due to COVID-19. Focusing on stock market returns, Alfaro et al. (2020) use data from the US and found that equity market value declined in response to pandemics such as COVID-19 and SARS. Likewise, Al-Awadhi et al. (2020) found overall share prices declined in China due to the expected adverse economic outcomes of COVID-19. Ashraf (2020a) examined data from 64 countries and found that overall stock markets reacted negatively to the COVID-19 outbreak however this reaction was only significant to the growth in number of confirmed cases but not to the growth in number of deaths. We add to this literature by finding that stringent social distancing measures have significantly weakened the stock markets’ negative reaction to the growth in COVID-19 confirmed cases. In this regard, our study is comparable to Ashraf (2020b) who shows that higher national-level uncertainty avoidance significantly strengthens the negative stock markets’ reaction to the growth in COVID-19 confirmed cases.

The rest of the paper proceeds as follows: Section  2 introduces data collection procedure. Section  3 introduces the indexes which measure government response during the COVID-19 pandemic. Section  4 explains testable hypotheses. Section  5 is about empirical model. Section  6 reports empirical results. Final section concludes the study.

2. Data collection

For the purpose of this study, we mainly collected data from three main sources: Daily stock market returns data was collected from the www.investing.com website. This data was available for around 80 countries. To maintain consistency, we choose only one major stock index from each sample country. Next, we downloaded the data of daily COVID-19 confirmed cases for each country from the John Hopkins University, Coronavirus Resource Centre (JHU-CRC) website. Lastly, we collected data of government response indexes from the OxCGRT website. We chose sample period from January 22 to April 17, 2020. We selected this sample period because both early COVID-19 confirmed cases and government responses in each country mainly occurred during this period. For example, Ramelli and Wagner (2020) argue that the most important period regarding market reaction to COVID-19 was from January 20 to March 20, 2020. Likewise, Hale et al. (2020a) show that average global government response curves flattened, and even started declining, from mid-April onward.

We appended three datasets together to get the main sample. We applied two filters to refine the main sample. First, we dropped countries with missing data of stock returns, COVID-19 confirmed cases or government response indexes. Second, we dropped daily observations with missing values of any of the required variables. Our refined sample consists of 2,750 daily observations from 77 countries over the period January 22 to April 17, 2020. Table 1 reports basic information about the sample distribution.

Sample information.

This table reports the sample countries, as well as the date of 1st COVID-19 confirm case, the main stock index and total daily data observations from each country.

3. Measurement of government actions

We use Oxford COVID-19 Government Response Tracker (OxCGRT) database ( Hale et al., 2020b ) to quantify governments’ response to COVID-19 led crisis. OXCGRT has measured governments’ responses with three main indexes: stringency index, containment and health index and economic support index.

Stringency index records information on social distancing measures and is coded from 8 indicators​ including school closing, workplace closing, cancel public events, restrictions on gathering size, close public transport, stay at home requirements, restrictions on internal movement and restrictions on international travel.

Economic support index is constructed from 2 indicators including the government income support and debt/contract relief for households programs. This index represents government policies regarding income support to citizens amid crisis.

Containment and health index is coded from 3 indicators representing public awareness campaigns, testing policy and contact tracing. This index represents government emergency policies regarding health system such as the COVID-19 testing regime.

Each of the three indexes is simple additive score of the underlying indicators, and is rescaled to vary from 0 to 100. The indexes are for comparative purposes and should not be interpreted as a rating of the appropriateness or effectiveness of a country’s response ( Hale et al., 2020a ). Appendix reports detailed definitions of these government response indexes.

4. Testable hypothesis

In this section, we draw testable hypotheses regarding the direct and indirect impact of announcements of government social distancing measures, containment and health policies and economic support programs on stock market returns.

Social distancing saves lives on the one hand, while imposes large costs on society due to the reduced economic activity on the other hand. Therefore, government actions, such as lockdowns and travel restrictions, targeted to ensure social distancing are expected to have both direct and indirect effects on stock returns. For the direct effect, such policies have adverse economic impact by shutting down places of work such as schools, offices, and factories. For instance, Sauvagnat et al. (2020) estimate that a 10% increase in state-level labor restrictions in the US led to a 3% drop in employment and a 1.87% drop in firms’ market value in the month of April 2020 only. When investors price these adverse valuation effects, the stringent government social distancing measures lead to decline in stock market returns. Based on this discussion, we write our first hypothesis in the following form:

H1a: The announcements of government social distancing measures lead to decline in stock market returns.

Despite the direct negative effect on economic activity, social distancing might also have positive economic impact by reducing the risk of mortalities ( Greenstone and Nigam, 2020 , Thunström et al., 2020 ). In this regard, Greenstone and Nigam (2020) estimate that moderate social distancing in the USA beginning from late March 2020 would save 1.7 million lives by October 1 in the USA. The major chunk of lives saved is due to avoided overwhelming of hospital intensive care units. Using the estimates of the United States Government’s value of a statistical life, they project $8 trillion economic benefits of social distancing through reduction in mortalities. Likewise, Thunström et al. (2020) estimate a net benefit of about $5.2 trillion of social distancing in the USA. The people in countries where government implemented stringent social distancing policies are more likely to practice social distancing ( Hussain, 2020 ) and hence have lower chances to get infected and consequently die from the virus. Thus, the benefits of social distancing mainly channeled through the reduction in new infections.

A number of recent studies show that stock markets reacted to the growth in COVID-19 confirmed cases with negative returns ( Al-Awadhi et al., 2020 , Ashraf, 2020a ). We postulate if social distancing has positive impact by reducing new infections, then stringent government social distancing measures would weaken the negative stock market reaction to the growth in confirmed cases. Our specific hypothesis is as follows:

H1b: The announcements of stringent government social distancing measures are likely to weaken the stock markets’ negative reaction to the growth in COVID-19 confirmed cases.

Likewise, stock market reaction to government measures regarding the containment and healthcare system might be positive. For instance, government aggressive information campaign provides awareness about the benefits of staying at home, sanitize common places and washing hands regularly. Moreover, testing and contact tracing helps to identify infected and suspected cases. In the early phases of the pandemic, countries such as South Korea and Japan have achieved enormous success in controlling the local outbreaks through extensive testing and contact tracing. Better healthcare policies are likely to lead to positive market reaction by boosting investors’ confidence and trust in government to control the pandemic.

H2a: The announcements of government containment and healthcare policies lead to increase in stock market returns.

Further, better containment and health policies are likely to produce benefits in terms of lower new infections and mortality rates. Lower mortality rate in turn provides enormous economic benefits in terms of more saved lives ( Greenstone and Nigam, 2020 , Thunström et al., 2020 ). Therefore, we hypothesis if public awareness campaigns and testing and contact tracing have positive impact by reducing new infections, then announcements of containment and health policies would weaken the negative stock market reaction to the growth in confirmed cases.

H2b: The announcement of government containment and health policies are likely to weaken the stock markets’ negative reaction to the growth in COVID-19 confirmed cases.

Finally, stock market reaction to government economic support programs is likely to be positive. Economic support programs, to some extent, can counter adverse impact of the social distancing measures on incomes and employment. Direct cash transfers help households to buy essential goods while staying under lockdowns. Therefore, investors might react positively to such actions and our specific hypothesis is as under.

H3a: The announcements of government economic support programs lead to increase stock market returns.

Income support programs might also affect stock returns by reducing the infection rate due to higher compliance with social distancing measures. Recent studies, such as Lou et al. (2020) and Wright et al. (2020) find that compliance with stay-at-home orders varies significantly with income, where lower-income groups are less likely to follow the orders and more likely to get exposed to the virus. Since income support is largely provided to poor segments of the society, more generous income support programs can lead to reduction in infection rates by motivating lower income individuals to stay at home.

H3b: The announcements of government income support packages are likely to weaken the stock markets’ negative reaction to the growth in COVID-19 confirmed cases.

5. Methodology

Following Ashraf (2020a) , we specify following pooled panel ordinary least squares regression model to examine the direct impact of government actions on stock market returns.

Here, Y is the dependent variable and measures stock market returns in county c on day t . α c is a constant term. Specifically, daily stock market return equals ( I n d e x v a l u e t − I n d e x v a l u e t − 1 ∕ I n d e x v a l u e t − 1 ) . Government response is represented with the daily change in three government response indexes from OxCGRT dataset ( Hale et al., 2020b ). These variables include stringency index, containment and health index and economic support index. Following Ashraf (2020a) who found that stock markets’ reaction was significant to COVID-19 cases but not to fatalities, we measure COVID-19 as the daily growth in COVID-19 confirmed cases.

In a cross-country setting, investors’ reaction to similar events might vary due to specific institutional or cultural contexts of countries ( Ashraf, 2020b ). Since our study sample is very short, most of the country-level factors remain fixed. Therefore, rather than to include individual country-level control variables, we add a matrix of country fixed-effects dummy variables. These dummy variables effectively control for all factors which remain fixed over the sample period but differ across sample countries. Stock markets also react to international events such as oil prices or major international events with strong spill-over effects across borders. To control for this systematic risk due to international factors, we include daily fixed-effects dummy variables, D t , in the model. ε c , t is an error term. We use heteroskedastic-robust standard errors to estimate p -values in regressions.

We modify Eq.  (1) as follows to examine the indirect impact of government actions on stock market returns through the channel of reduction in new infections.

The interaction term, ( Δ G o v e r n m e n t r e s p o n s e c , t ) × ( C O V I D − 1 9 c , t − 1 ) , is the main variable of interest where the estimated values of coefficient, β 3 , show whether the stock market reaction to the growth in COVID-19 confirmed cases depends on government actions. We use interaction terms for each of the three government response indexes with growth in confirmed cases. All other variables are same as in Eq.  (1) .

Summary statistics.

This table reports the summary statistics of main variables. Stock market returns is measured as the daily change in major stock index of a country. Growth in confirmed cases is measured as the daily growth in COVID-19 confirmed cases in a country. Stringency index represents the announcements of government social distancing measures, such as closure of schools, work places and public places, and restrictions on internal and international travel. Containment and health index represents the announcements of government policies regarding public awareness campaigns, testing policy and contact tracing. Economic support index represents the government announcements of income support and debt/contract relief for households.

6. Empirical analysis

This section reports empirical results. Table 2 reports summary statistics for main variables. The stock market returns variable has a mean value of −0.00 with a standard deviation of 0.03. Zero mean value confirms the random walk property of stock market returns. The 0.17 mean value of the growth in confirmed COVID-19 cases variable indicates on average COVID-19 cases observed a 17 percent daily increase. The minimum and maximum values of government response indexes show that governments have responded with significant changes in policies.

Table 3 reports main empirical results. Model 1 is the baseline specification. The growth in confirmed cases variable enters negative and significant. This result confirms the findings of previous studies, such as Al-Awadhi et al. (2020) , Alfaro et al. (2020) and Ashraf (2020a) that stock markets reacted to COVID-19 outbreaks with strong negative returns, and validates our model for further analysis. We include government response indexes in Model 2. The stringency index enters negative and significant showing that stock markets react with negative returns to government actions regarding increase in social distancing measures. This result indicates that corporate valuations on average decline due to the adverse effect of social distancing on economic activity and supports our hypothesis H1a. Both containment and health, and economic support indexes enter positive showing that overall stock markets reacted to these government actions with positive returns. However, the result of economic support index is not statistically significant. One possible reason is that economic support index, which we use, measures the income and debt relief support to households but not to businesses. Therefore, stock market reaction to these actions, though positive, is not very strong. On the contrary, stock markets might have reacted more strongly to financial support to businesses which, unfortunately, economic support index does not measure. Future studies might focus on this area.

Impact of government actions amid COVID-19 on stock market returns.

This table reports the results regarding the impact of government actions to control COVID-19 pandemic on stock market returns. Stock market returns is dependent variable in all models and is measured as the daily change in major stock index of a country. Growth in confirmed cases is measured as the daily growth in COVID-19 confirmed cases in a country. Stringency index represents the announcements regarding government social distancing measures, such as closure of schools, work places and public places, and restrictions on internal and international travel. Containment and health index represents the announcements regarding government policies such as public awareness campaigns, testing policy and contact tracing. Economic support index represents the announcements regarding government income support and debt/contract relief for households programs. Panel pooled ordinary least squares model, with heteroskedasticity robust standard errors, is used for estimations. P -values are given in parenthesis.

Next, we examine how government actions interact with the growth in COVID-19 confirmed cases to affect stock market returns. As shown in Model 3, the interaction term, Growth in confirmed cases × Stringency index, enters positive and significant suggesting that the negative impact of growth in confirmed cases on stock market returns weakens in countries with more stringent social distancing measures. This result confirms that markets take social distancing positively because of its effectiveness in reducing the number of COVID-19 confirmed cases. Other two interaction terms, Growth in confirmed cases × Containment and health index and Growth in confirmed cases × Economic support index, are not statistically significant suggesting that the impact of government actions related to healthcare and income support is not channeled through the reduction in confirmed cases. Together, these results suggest investors expect that government social distancing measures are the most effective mechanism to contain the disease while public awareness and testing and quarantining policies are less so.

Following Ashraf et al. (2020) , we use graphical approach to explain the moderating effect of government actions on the relationship between stock returns and growth in confirmed cases with interaction terms. For doing so, we graph relationship between stock returns and growth in confirmed cases at mean and ± one standard deviation of mean value of all three government response indexes, one-by-one. Graphs 1, 2 and 3 in Fig. 1 are drawn from Model 3 of Table 3 .

The indirect impact of government actions on stock returns through the channel of reduction in COVID-19 confirmed cases.

The overall downward slopped lines in these graphs show that stock market returns and growth in confirmed cases are negatively associated. However, lines with different slopes in each graph show that the negative association between stock returns and growth in confirmed cases varies with variation in government actions. This variation is the strongest in Graph 1 for social distancing measures where the slope of the lower line (with embedded circles) turns to be positive as compared to the negative slope of the upper line (with embedded squares). This suggests when government implements stringent social distancing measures, the stock markets’ negative reaction to the growth in confirmed cases not only weakens but becomes positive. In Graphs 2 and 3, slopes of upper and lower lines change only slightly and remain negative confirming that government actions regarding containment and health, and economic support do not significantly moderate the negative association between stock returns and growth in confirmed cases.

We perform several robustness tests to further confirm the above results. In this regard, first we replace country fixed-effects dummies with country-level macroeconomic and institutional control variables. Specifically, following Ashraf (2020a) , we include log (GDP), investment freedom, democratic accountability and uncertainty avoidance. Definitions of these variables are given in Appendix . Log (GDP) variable controls for the differences in economic development of countries. Investment freedom index measures the easiness with which foreign investors can invest in a country and controls for the presence of foreign competition in local financial market. Democratic accountability index controls for the cross-country differences in political institutions. Likewise, uncertainty avoidance index controls for the differences in uncertainty aversion of stock market investors from different countries. As shown in Table 4 , the main results largely are similar to those in Table 3 even after replacing country fixed-effects dummies with specific country-level control variables.

This table reports the results regarding the impact of government actions to control COVID-19 pandemic on stock market returns. Stock market returns is dependent variable in all models and is measured as the daily change in major stock index of a country. Growth in confirmed cases is measured as the daily growth in COVID-19 confirmed cases in a country. Stringency index represents the announcements regarding government social distancing measures, such as closure of schools, work places and public places, and restrictions on internal and international travel. Containment and health index represents the announcements regarding government policies such as public awareness campaigns, testing policy and contact tracing. Economic support index represents the announcements regarding government income support and debt/contract relief for households programs. Log (GDP) is measured as the log of gross domestic product of a country. Investment freedom represents financial market liberalization where higher values represent more freedom for foreign investors to invest in local financial markets and vice versa. Democratic accountability index measures political institutions where higher values represent democratic political institutions while lower values stand for autocratic institutions. Uncertainty avoidance measures cultural uncertainty aversion where higher values show the individuals are more uncertainty averse and vice versa. Panel pooled ordinary least squares model, with heteroskedasticity robust standard errors, is used for estimations. P -values are given in parenthesis.

Second, we use panel random-effects model as an alternative estimation method and re-estimate all specifications of Table 3 . In unreported results, 1 we observe findings largely remain similar as in Table 3 .

7. Conclusion

In this paper, we examine the expected economic impact of government actions, such as social distancing measures, public awareness programs, testing and quarantining policies, and economic support packages, during the COVID-19 pandemic by analyzing the effect of such actions on stock market returns. For empirical analysis, we use the daily data of stock market returns, growth in COVID-19 confirmed cases and announcements regarding government policies from 77 countries over the period January 22 to April 17, 2020.

We find the announcements regarding the implementation of social distancing measures by governments have dual, a direct negative and an indirect positive, effect on stock market returns. Specifically, the announcements of social distancing measures result in negative stock market returns due to their expected adverse impact on economic activity. While these announcements lead to positive market returns through the channel of reduction in COVID-19 confirmed cases. Government announcements regarding public awareness programs, testing and quarantining policies, and income support packages largely result in positive market returns.

Our findings have important implications. Though some studies such as Heyden and Heyden (2020) , Shanaev et al. (2020) and Zaremba et al. (2020) show government social distancing measures are counterproductive, however we show that such measures also have indirect beneficial economic impact through the channel of reduction in the intensity of COVID-19 outbreaks. Therefore, it is difficult to predict their net impact on economic outcomes and more research needs to be done with the availability of further data to better understand the economic impact of such government measures. Our findings to some extent are aligned with Correia et al. (2020) who find that stringent non-pharmaceutical interventions used across the U.S. cities during the 1918 Flu Pandemic led to better economic outcomes in the medium run. As the frequency of pandemics, including contagious diseases, has increased over recent decades ( Ross et al., 2015 ), a consensus regarding the net economic impact of government social distancing measures can help in designing better government response in the future.

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

1 Results are available from authors on request.

See Table A.1 .

Variable definitions.

• Al-Awadhi A.M., Al-Saifi K., Al-Awadhi A., Alhamadi S. Death and contagious infectious diseases: Impact of the COVID-19 virus on stock market returns. J. Behav. Exp. Finance. 2020 [ PMC free article ] [ PubMed ] [ Google Scholar ]
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Government Intervention

Government intervention is regulatory action taken by government that seek to change the decisions made by individuals, groups and organisations about social and economic matters.

Government intervention is any action carried out by the government that affects the market with the objective of changing the free market equilibrium / outcome.

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In the News Teaching Activity – growing obesity and its health costs (Mar 2024)

7th March 2024

In the News Teaching Activity – will the government’s latest dental policies get to the root of the NHS dentist shortage problem? (Feb 2024)

15th February 2024

In the News Teaching Activity – Lack of competition in the baby milk formula market is adding to the cost-of-living crisis (Dec 2023)

4th December 2023

Government Intervention - Australia Bans Imported Disposable Vapes

28th November 2023

Is the sugar tax cutting teeth extractions among the young?

17th November 2023

Government Intervention - Price paid for UK offshore power to rise by 66%

16th November 2023

Edexcel A-Level Economics - Theme 1 Knowledge Organiser

Poster / Student Handout

4.1.8.9 Government Intervention - Maximum Prices (AQA A-Level Economics Teaching PowerPoint)

Teaching PowerPoints

4.1.8.9 Government Intervention - Minimum Prices (AQA A-Level Economics Teaching PowerPoint)

Market failure and government failure: could a tax curb meat’s health and environmental problems.

Study Notes

1.4.1 Maximum Prices (Edexcel A-Level Economics Teaching PowerPoint)

1.4.1 minimum prices (edexcel a-level economics teaching powerpoint), 1.4.1 government intervention in markets (edexcel), 1.1.6 free market economies, mixed economy and command economy, 1.3.2 externalities and government intervention (edexcel a-level economics teaching powerpoint), in the news teaching activity: vaping and negative externalities (sept 2023).

11th September 2023

Government Intervention - Is it Time for a Meat Tax?

France to spend €200m on destroying excess wine as demand falls.

27th August 2023

What are unintended consequences in economics?

What are economic incentives and why are they important, government intervention - evaluating uk steel subsidies.

Topic Videos

Revision Session on Government Intervention

3rd May 2023

De-Merit Goods - Australia to ban recreational vaping

Norway's salmon tax - a leap towards sustainability.

4th April 2023

De-merit goods - should the government toughen gambling laws?

29th March 2023

Economic Development - Do Buffer Stocks Work?

Market failure and government intervention - the row over london’s ultra-low emission zone.

7th March 2023

Can buffer stock schemes help to promote economic growth and development in low income countries?

Should home insulation in the uk be subsidised.

16th February 2023

Government Intervention - What is a Pigouvian Tax?

Significance of ped with indirect taxes, uk bus price cap scheme is extended.

19th December 2022

New Zealand legislates to ban cigarettes for future generations

15th December 2022

Bus fares in England to be capped at £2 per journey for 3 months

3rd September 2022

Shifts in Demand and Supply - Fish and Chip Shops Facing Closure

24th August 2022

Energy Price Crisis - Is there a case for government subsidy of energy intensive industries?

14th August 2022

Plastic packaging disposal tops 100 billion pieces a year in the UK

13th July 2022

Unintended Consequences - The Impact of a Minimum Price on Alcohol

10th June 2022

Plans to raise the minimum legal age for smoking to 21 years

8th June 2022

2022 Exams - Policies to Reduce Negative Production Externalities

Evaluating government intervention.

Exam Support

Government Intervention - Economics of Carbon Taxes

Key diagrams - producer subsidies (supply and demand analysis), key diagrams - producer subsidies (cost and revenue analysis), government intervention - analysis diagram for a specific tax, evaluating government intervention.

18th April 2018

Government intervention - Paris announces car ban for central districts

23rd February 2022

Plastic Packaging Tax (Revision Essay Plan)

Welfare loss from indirect taxes, sugar tax (student essay).

Practice Exam Questions

UK government offers consumer subsidy for heat pumps

19th October 2021

Free Markets

Teaching activity: introduction to economics (gcse).

Teaching Activities

Maximum prices - Why rent control isn’t working in Sweden

27th August 2021

Pigouvian Taxes - Beyond Meat boss backs tax on meat consumption

3rd August 2021

Education economics - should government intervene to mandate lower tuition fees for local students?

22nd July 2021

Vodafone fined for breaches of consumer protection rules

26th October 2016

Smog and the Clean Air Act

27th November 2016

Ban on online junk food ads for kids

8th December 2016

Finland aims to be tobacco free by 2040

28th January 2017

State Intervention – Growth and Development

Market failure & government intervention (revision presentation), privatisation, stakeholders (government intervention), fiscal policy - government intervention, government intervention - maximum prices, government intervention - indirect taxes, government intervention - buffer stock schemes, government failure (revision presentation), as micro multiple choice: subsidies for social housing, revision presentation on government failure, producer subsidies, pollution taxes and negative externalities, minimum wages - analysis of impact (labour markets), maximum prices - analysis, evaluating government intervention in markets, maximum prices - 2021 revision update, government intervention: could new legislation change uk betting firms for good.

1st February 2021

Minimum Prices - 2021 Revision Update

Indirect taxes and producer surplus, subsidies - 2021 revision update, regulating emissions: should ads for large polluting vehicles be banned.

6th August 2020

Changes in Demand - Match Up Activity

Quizzes & Activities

Competition policy - an investigation into government intervention to promote competition in markets [Year 12]

17th June 2020

Gambling and Behavioural Economics [Head Start in A-Level Economics]

Government failure (online lesson).

Online Lessons

Government Failure: Would a junk food tax cause government failure

Introduction to supply side policies (online lesson), sugar (soda) taxes (government intervention).

Should the sugar tax be scrapped?

16th July 2019

Paper 1 Micro: Top Revision Videos on Market Failure and Government Intervention

Us imposes ban on flavoured e-cigarettes.

3rd January 2020

Market Failure and Government Intervention - Clear The Deck Key Term Knowledge Activity

Chinese government rations pork and sets maximum prices.

12th November 2019

Scottish minimum alcohol price reduces demand

26th September 2019

Spare ribs? China to tap pork reserves as swine fever hits industry

19th September 2019

Scottish alcohol sales drop after minimum price intervention

21st June 2019

Market for Electric Vehicles (Revision Essay Plan)

Key micro diagrams (government intervention), test 3 - edge in economics revision mc - government intervention, indirect taxes (government intervention), producer subsidies (government intervention), synoptic economics revision - solar energy policy, energy price cap - analysis and evaluation arguments, economics of a latte levy - kaa and evaluation paragraphs, rent controls - analysis and evaluation points, producer support in markets, plastic bottle tax (chain of analysis), should the uk rail industry be nationalised, edexcel theme 3 micro knowledge book - government intervention, uk plastic bag charge set to be doubled to 10p.

27th December 2018

Chief Medical Officer calls for extended sugar and salt bans

21st December 2018

Minimum Alcohol Pricing (Revision Essay Plan)

Micro and macro effects of an executive pay cap (labour markets), government intervention in markets (quizlet activity), government floats ban on energy drinks for under-18s.

30th August 2018

What is the most convenient way to provide the public loo?

15th August 2018

Government Intervention - Subsidies

Buffer stock schemes (government intervention), minimum wage and living wage (government intervention), maximum prices (government intervention), government intervention - minimum prices, regulations (government intervention), government failure, negative externalities and government intervention, analysing and evaluating government intervention in markets, building confidence in writing synoptic 25 mark essays (edexcel), department of awesome evaluation (updated: june 2018), edge revision webinar: market failure and government intervention, test 18: a level economics: mcq revision on indirect taxes and subsidies, policies to improve food affordability (revision essay plan), misguided sugar tax unlikely to be effective in tackling obesity.

12th April 2018

Minimum Alcohol Prices (Government Intervention)

Test 1: a level economics: mcq revision on market failure and government intervention, taxing de-merit goods (chain of analysis), economics of health care funding, congestion in uk cities - 'ranking activity'.

6th February 2018

Privatisation and Regulation - FT series of articles

24th January 2018

Credit card surcharge bans and government failure

18th January 2018

UK bans microbeads

9th January 2018

Using the negative externalities of plastic as practice of exam technique

10th December 2017

Pay-per-mile scheme considered for non-British lorries

30th December 2017

Elasticity of Demand in Action: Sugary Drink Demand and Higher Prices

17th October 2017

Evaluating the pub smoking ban

1st October 2017

France makes childhood vaccinations compulsory

9th August 2017

10 Years on from the Smoking Ban

2nd July 2017

Microeconomics diagram in your pocket

4th June 2017

Indirect Taxes and Economic Welfare (MCQ Revision Questions)

Positive externalities from breakfast clubs.

10th April 2017

Further intervention suggested in Fixed Odds Betting Terminal market

31st January 2017

Intervention in Markets - Will the legal highs ban work?

31st May 2016

​Growth and Governments

26th May 2016

New cigarette packaging regulations comes in to force today

20th May 2016

Bacon sandwich with sugar, anyone?

27th October 2015

Jamie Oliver calls for Sugar Tax on Soft Drinks

20th October 2015

US sugar tax effectiveness questioned

27th August 2015

Resources on the Sugar Tax

20th March 2016

​Economics for the Breaking Bad Generation

16th March 2016

​The Bots Are Taking Over!

24th February 2016

Market Failure and Behavioural Policies - Research Assignment

7th February 2016

HS2 to arrive early - in Crewe?

30th November 2015

IPencil and the Rise of Activist Laizzez-Faire

25th November 2015

Scotland introduces a minimum charge for plastic bags

21st October 2014

Plain packaging for cigarettes

17th February 2015

CMA targets pay day lenders and comparison websites

24th February 2015

The Invisible Hand of the Ticket Tout

1st March 2015

Building the Entrepreneurial State

2nd April 2015

Climate Change Coal and Intervention

30th May 2015

Climate Change, coal, and Government and Business Intervention

Wearable tech - the new 'merit good'.

19th August 2015

Scottish Minimum Price for Alcohol Faces Delay

3rd September 2015

The Irish potato famine - classic demand and supply

22nd September 2015

UK Steelmakers seek government help

24th September 2015

Tobacco tax increase is urged

12th October 2015

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15.5 Government Policies to Reduce Income Inequality

Learning objectives.

• Explain the arguments for and against government intervention in a market economy
• Identify beneficial ways to reduce the economic inequality in a society
• Show the tradeoff between incentives and income equality

No society should expect or desire complete equality of income at a given point in time, for a number of reasons. First, most workers receive relatively low earnings in their first few jobs, higher earnings as they reach middle age, and then lower earnings after retirement. Thus, a society with people of varying ages will have a certain amount of income inequality. Second, people’s preferences and desires differ. Some are willing to work long hours to have income for large houses, fast cars and computers, luxury vacations, and the ability to support children and grandchildren.

These factors all imply that a snapshot of inequality in a given year does not provide an accurate picture of how people’s incomes rise and fall over time. Even if we expect some degree of economic inequality at any point in time, how much inequality should there be? There is also the difference between income and wealth, as the following Clear It Up feature explains.

Clear It Up

How do you measure wealth versus income inequality.

Income is a flow of money received, often measured on a monthly or an annual basis. Wealth is the sum of the value of all assets, including money in bank accounts, financial investments, a pension fund, and the value of a home. In calculating wealth, one must subtract all debts, such as debt owed on a home mortgage and on credit cards. A retired person, for example, may have relatively little income in a given year, other than a pension or Social Security. However, if that person has saved and invested over time, the person’s accumulated wealth can be quite substantial.

In the United States, the wealth distribution is more unequal than the income distribution, because differences in income can accumulate over time to make even larger differences in wealth. However, we can measure the degree of inequality in the wealth distribution with the same tools we use to measure the inequality in the income distribution, like quintile measurements. Once every three years the Federal Reserve Bank publishes the Survey of Consumer Finance which reports a collection of data on wealth.

Even if they cannot answer the question of how much inequality is too much, economists can still play an important role in spelling out policy options and tradeoffs. If a society decides to reduce the level of economic inequality, it has three main sets of tools: redistribution from those with high incomes to those with low incomes; trying to assure that a ladder of opportunity is widely available; and a tax on inheritance.

Redistribution

Redistribution means taking income from those with higher incomes and providing income to those with lower incomes. Earlier in this chapter, we considered some of the key government policies that provide support for people experiencing poverty: the welfare program TANF, the earned income tax credit, SNAP, and Medicaid. If a reduction in inequality is desired, these programs could receive additional funding.

The federal income tax, which is a progressive tax system designed in such a way that the rich pay a higher percent in income taxes than the poor, funds the programs. Data from household income tax returns in 2018 shows that the top 1% of households had an average income of $1,679,000 per year in pre-tax income and paid an average federal tax rate of 25.4%. The effective income tax , which is total taxes paid divided by total income (all sources of income such as wages, profits, interest, rental income, and government transfers such as veterans’ benefits), was much lower. The effective tax paid by that top 1% of householders paid was 20.4%, while the bottom two quintiles actually paid negative effective income taxes, because of provisions like the earned income tax credit. News stories occasionally report on a high-income person who has managed to pay very little in taxes, but while such individual cases exist, according to the Congressional Budget Office, the typical pattern is that people with higher incomes pay a higher average share of their income in federal income taxes.

Of course, the fact that some degree of redistribution occurs now through the federal income tax and government antipoverty programs does not settle the questions of how much redistribution is appropriate, and whether more redistribution should occur.

The Ladder of Opportunity

Economic inequality is perhaps most troubling when it is not the result of effort or talent, but instead is determined by the circumstances under which a child grows up. One child attends a well-run grade school and high school and heads on to college, while parents help out by supporting education and other interests, paying for college, a first car, and a first house, and offering work connections that lead to internships and jobs. Another child attends a poorly run grade school, barely makes it through a low-quality high school, does not go to college, and lacks family and peer support. These two children may be similar in their underlying talents and in the effort they put forth, but their economic outcomes are likely to be quite different.

Public policy can attempt to build a ladder of opportunities so that, even though all children will never come from identical families and attend identical schools, each child has a reasonable opportunity to attain an economic niche in society based on their interests, desires, talents, and efforts. Table 15.8 shows some of those initiatives.

Some have called the United States a land of opportunity. Although the general idea of a ladder of opportunity for all citizens continues to exert a powerful attraction, specifics are often quite controversial. Society can experiment with a wide variety of proposals for building a ladder of opportunity, especially for those who otherwise seem likely to start their lives in a disadvantaged position. The government needs to carry out such policy experiments in a spirit of open-mindedness, because some will succeed while others will not show positive results or will cost too much to enact on a widespread basis.

Inheritance Taxes

There is always a debate about inheritance taxes. It goes like this: Why should people who have worked hard all their lives and saved up a substantial nest egg not be able to give their money and possessions to their children and grandchildren? In particular, it would seem un-American if children were unable to inherit a family business or a family home. Alternatively, many Americans are far more comfortable with inequality resulting from high-income people who earned their money by starting innovative new companies than they are with inequality resulting from high-income people who have inherited money from rich parents.

The United States does have an estate tax —that is, a tax imposed on the value of an inheritance—which suggests a willingness to limit how much wealth one can pass on as an inheritance. However, in 2022 the estate tax applied only to those leaving inheritances of more than $12.06 million and thus applies to only a tiny percentage of those with high levels of wealth.

The Tradeoff between Incentives and Income Equality

Government policies to reduce poverty or to encourage economic equality, if carried to extremes, can injure incentives for economic output. The poverty trap, for example, defines a situation where guaranteeing a certain level of income can eliminate or reduce the incentive to work. An extremely high degree of redistribution, with very high taxes on the rich, would be likely to discourage work and entrepreneurship. Thus, it is common to draw the tradeoff between economic output and equality, as Figure 15.10 (a) shows. In this formulation, if society wishes a high level of economic output, like point A, it must also accept a high degree of inequality. Conversely, if society wants a high level of equality, like point B, it must accept a lower level of economic output because of reduced incentives for production.

This view of the tradeoff between economic output and equality may be too pessimistic, and Figure 15.10 (b) presents an alternate vision. Here, the tradeoff between economic output and equality first slopes up, in the vicinity of choice C, suggesting that certain programs might increase both output and economic equality. For example, the policy of providing free public education has an element of redistribution, since the value of the public schooling received by children of low-income families is clearly higher than what low-income families pay in taxes. A well-educated population, however, is also an enormously powerful factor in providing the skilled workers of tomorrow and helping the economy to grow and expand. In this case, equality and economic growth may complement each other.

Moreover, policies to diminish inequality and soften the hardship of poverty may sustain political support for a market economy. After all, if society does not make some effort toward reducing inequality and poverty, the alternative might be that people would rebel against market forces. Citizens might seek economic security by demanding that their legislators pass laws forbidding employers from ever laying off workers or reducing wages, or laws that would impose price floors and price ceilings and shut off international trade. From this viewpoint, policies to reduce inequality may help economic output by building social support for allowing markets to operate.

The tradeoff in Figure 15.10 (b) then flattens out in the area between points D and E, which reflects the pattern that a number of countries that provide similar levels of income to their citizens—the United States, Canada, European Union nations, Japan, and Australia—have different levels of inequality. The pattern suggests that countries in this range could choose a greater or a lesser degree of inequality without much impact on economic output. Only if these countries push for a much higher level of equality, like at point F, will they experience the diminished incentives that lead to lower levels of economic output. In this view, while a danger always exists that an agenda to reduce poverty or inequality can be poorly designed or pushed too far, it is also possible to discover and design policies that improve equality and do not injure incentives for economic output by very much—or even improve such incentives.

Bring It Home

Occupy wall street.

The Occupy movement took on a life of its own over the last few months of 2011, bringing to light issues that many people faced on the lower end of the income distribution. The contents of this chapter indicate that there is a significant amount of income inequality in the United States. The question is: What should be done about it?

The 2008-2009 Great Recession caused unemployment to rise and incomes to fall. Many people attribute the recession to mismanagement of the financial system by bankers and financial managers—those in the 1% of the income distribution—but those in lower quintiles bore the greater burden of the recession through unemployment. This seemed to present the picture of inequality in a different light: the group that seemed responsible for the recession was not the group that seemed to bear the burden of the decline in output. A burden shared can bring a society closer together. A burden pushed off onto others can polarize it.

On one level, the problem with trying to reduce income inequality comes down to whether you still believe in the American Dream. If you believe that one day you will have your American Dream—a large income, large house, happy family, or whatever else you would like to have in life—then you do not necessarily want to prevent anyone else from living out their dream. You certainly would not want to run the risk that someone would want to take part of your dream away from you. Thus, there is some reluctance to engage in a redistributive policy to reduce inequality.

However, when those for whom the likelihood of living the American Dream is very small are considered, there are sound arguments in favor of trying to create greater balance. As the text indicated, a little more income equality, gained through long-term programs like increased education and job training, can increase overall economic output. Then everyone is made better off, and the 1% will not seem like such a small group any more.

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Economic Theory and Government Intervention Essay

Milton friedman and his contributions to political and economic philosophy.

Milton Friedman is a renowned American economist. In that case, he has contributed greatly to various fields such as statistics, microeconomics, macroeconomics and economic history. Furthermore, he advocated for the laissez-faire capitalism (Kasper 2002).

In his effort to create social and political freedom, Milton Friedman advocated for freedom and capitalism with an aim of limiting the government role in a free market economy. Additionally, in 1976, he was awarded with the Nobel Prize in economics.

This was in appreciation for his achievements in monetary, history and consumption analysis fields. Apart from his expertise in the above mentioned fields, he was also awarded for his portrayal of the stabilization policy complexity.

The American conservatives’ outlooks were greatly shaped by his political philosophy. This philosophy stressed on the market place advantages and challenges that accompanied government intervention.

Furthermore, his political philosophy impacted significantly on numerous countries and also Ronald Reagan economic policy during his reign as the administrator of the United States after 1980.

In his arguments, he pointed out that the great depression that was experienced in the United States was as a result of money supply mismanagement by the government. This was in reference to the United States Monetary History.

Between the years 1941-1943, Friedman had a chance to work for the centralized government. During this time, he advocated for Keynesian taxation policy (Keynes 1936). This policy helped greatly in developing the income tax payments payroll with-holding system.

In summary, Friedman was indeed the principal advocate of the monetarist economic thought. He based his argument on the claim that there exist a stable and close correlation between money supply and inflation.

Of importance is that the inflation phenomena needs to be regulated by taking charge of the amount supplied by the Federal Reserve Bank to the national economy. Friedman rejected the utilization of fiscal policy as a demand management tool.

In his view, he held that the role of the government in economy guidance should be extremely restricted (Bowman 2009).

Milton Friedman – Lesson of the Pencil

Milton Friedman outlines the concept of free to choose by use of a pencil as an example and the price system examination. The video utilizes various concepts in economics.

Adam Smith is perceived as the modern economics founder. As illustrated by Friedman in “Free to choose”, the principal insight by Smith in his treatise” The wealth of nations” was based on voluntary exchange where both parties can gain.

As individuals are in pursuit of their own benefits, they do contribute to the benefits of the society, as is lead by a hand that is invisible. This is most experienced in an environment characterized by political and environmental freedom.

In these environments, decisions are influenced by the price system. Price functions effectively in three main ways. These are some of the examples.

Price helps in transmitting of information: in case of supply disruption, consumers are often charged more by the producers. In situations where product prices increases co0nsumers seek for substitute products thereby restoring demand and supply equilibrium.

Production incentives: Limited supply of a product in the market increases its price thus allowing higher wages for the industry in question. Higher wages corresponds to increased need for labor to meet the demand in the market.

Income distribution: As a result of choices, income, wages and salary arise. Occupation characterized with low supply, to be precise those that are in need high levels of skills and training attracts more workers as result of their bid for higher incomes. Unnecessary or Oversupplied occupations have low value as less people get attracted to then due to low incomes.

Productivity is the driver of any economy. As argued by Smith, productivity can only be increased through specialization or division of labor.

The lesson of the pencil video illustrates that no single individual has the knowledge of making a pencil because no one exhibit the capacity to comprehend all that is needed to make a pencil in order to achieve that goal. The price system enables individuals to specialize in their area of their expertise.

As a result of specialization, there is manufacturing of products that are complex. The price system can be manipulated by coercion, which corrupts it. As a result of human ingenuity, wealth is not a game that one part has to gain while other looses as a result of competition.

On the contrary, new and more wealth can be generated. This is only if there is intersection between economic, political and personal freedom.

Government plays a significant role in proving for those services and goods that people cannot afford to pay for such as the national security. Most of these goods are known as public goods and are paid for through taxes (Anonymous 2012).

How Economic theory provides to government intervention

The extent of government intervention when it comes to maters regarding the economy is highly debated and divides the economists (Ng, 2000, p.10).

This has been experiences in various manifestations such as the public expenditure size as a gross domestic product (GDP) percentage, the financial regulations of the markets and the level of labor, the degree and structure of both indirect and direct taxation.

The government size and its role are among the enduring and fundamental debates in the politics of the Americans. Government intervention benefits can be analyzed in various specific areas of the economy.

However, government intervention cannot provide answers to various questions asked such as if there is “too little” or “too much” of overall government activity. Some governments programs have been found to be ineffective and insufficient by economists.

Some of them are counterproductive and cannot met targets sets by specific policies. Limiting government spending that is inefficient would benefit a country’s economy. Besides, reducing effective spending by the government will destroy it.

Furthermore, reducing government size could include either efficient or inefficient government spending. Government intervention can help in increasing the efficiency of an economy. This is applicable where there is markets and externalities failure.

In the light of the above, government intervention was supported by Keynes during the economic turmoil crisis. The theories presented by Keynes were such as the “General theory”.

The theory points out that, most economies are unstable and full employment can only occur if there is a boost from the public investments and government policies. It is the work of the government to close the gap that exists between the potential of an economy and its actual output at times of financial crisis.

As a matter of fact, during economic depression, the governments have the capability of boosting demand by spending a lot of cash. In support of the statement, during economic depression, a lot of resources lie idle for instance individual who are in need of a job and surplus capacities in the factory in the period of the economy.

Given this context, government is allowed to spend more money. According to Keynes point of view, when the principal economy pillar (including next exports, investment and consumer spending) falls, the only pillar that can offer support to the economy is the government.

Explanation of Increases in GDP in the United States and Other Developed Nations

The increase in the GDP in most developed countries is as a result of gradual increase of government outlays. The emergence of democracy in the 20th century and the provision of social welfare gains including major wars, have significantly contributed to government spending increases in the economy.

In addition to that, the government extreme intervention forms also referred to as ‘command economies’ have failed in matching the economic rate of growth and development in mixed economies.

Inexistence of private properties and free enterprises has subdued innovations and incentives in various developed countries such as Cuba and North Korea.

This was also evident in the downfall of the USSR. Government intervention impacts detrimentally on the growth of the economy as well as people’s standards of living.

In comparison to developing countries where the principal form of government spending is the defense, in developed countries, the government s[pending largest share is channeled to social welfare benefits such as family allowances, pensions, unemployment and sickness benefits, housing, education and health.

The attention to equity considerations by developed countries needs to be adequately financed through taxation. Taxation is viewed by free marketers as resulting to inefficiency (Lombard, 2010, p.313).

The Demand and Supply Curve(No intervention from the government)

The point at which the demand and supply curve meets is what is known as Equilibrium. As a result, the consumers in the market do not experience goods shortage or surplus. A shortage can only be experienced when the quantity demanded is higher than the quantity supplied.

This occurs when the prices for products or services are too low in the market. However, there exists surplus in the market when prices are high and consumers are unwilling to purchase the products. In free market economy, quantities and prices of goods supplied tend to move towards the equilibrium thereby stabilizing the market.

From the above demand and supply curve, the equilibrium price in the market is $ 1.50. With this price, consumers are supplied with seventy five liters of petrol per week.

Market equilibrium helps in explaining the movement of goods along the supply or demand curve. Market equilibrium does not give illustrations on the changes on demand and (Mind tools, 2012, p.1).

The graph below illustrates the impacts of a price cap that is below the market equilibrium price.

The graph dashed line indicates the maximum price (ceiling price) imposed by the government above the equilibrium price determined by the market. In that case, it has no significant impact on the price of the product.

In this condition, the market is incapable of generating a price that is high other than the ceiling price. A different impact results when the maximum price imposed by the government is below the equilibrium price set by the market.

This is illustrated by the solid line in the above graph. The price demanded by the market can no longer be charged by suppliers. As a result, they are compelled to adhere to the government’s maximum price set by the price ceiling.

Suppliers can be drawn out of the market by a low ceiling price. On the other hand, low ceiling price increases the demand of the consumers. When demand surpasses supply, shortage occurs.

As a result, products in the market are subjected to rationing. This is evidenced by long customer lines. Sometimes products are unavailable despite the consumers’ desire or need to buy the products.

In some instances, governments integrate government rationing programs with low price ceilings. The combination of these two controls how the allocation of insufficient supply of goods will be done by the market.

Short-term and Long-term effects of introducing a first home buyer grant and then phasing it out

In order to perfectly answer the above question, Australia will be taken as a case study. Housing is a necessity that is basic and plays a significant role in promoting individual health and living standards.

Therefore, housing demand services can be said to be inelastic. The demand price elasticity links the change in the demanded quantity as an outcome of a change in the housing prices (Mayo 1981).

Alternatively, the demand income elasticity for homeownership is elastic. This is because income levels that are high tend to produce more spending on home purchases in comparison to rent (Housing Industry of Australia, 2002, p.4). Households with higher incomes have the opportunity of saving a housing deposit.

In addition to that, they are highly qualified for a home loan in comparison to their counterparts. As a result, home owners exhibiting a mortgage number increases proportionately with income (Australian Institute of Health and Welfare 2008).

Before examining the effects of the First Home Buyers Grant (FHOG) on first home buyers’ decision to buy a home, it is vital to take into consideration of other factors affecting home ownership demand. The key determinant factors are such as population growth and size.

For example, the more the people in the market, the housing stronger demand. Household size and age, rate of divorce and marriage, the income household levels influences the location, type of dwelling and housing demand preferred by purchasers.

Interest rate changing affects home ownership affordability. The FHOG helps buyers to home ownership deposit requirements. This increases their chance of buying a house and becoming home owners.

The stump duty reduction impacted negatively on housing demand before stamp policy enactment (Costello, 2006, p.10). The negative impact was as a result of prospective purchasers stalling their purchases.

However, after the introduction of the concessions there was substantial increase in the segments market of specific first home buyers. The concession resulted to a lagged impact on the collective housing market. This is because cheap housing sellers traded up to properties that were extremely expensive.

The FHOG impacts significantly on borrowing. For instance, it relaxes constraints in borrowing for first time buyers. In addition to that, grant enhances home buyers potential saving with an aim of fulfilling the deposit needs for a loan. Even with the absence of grant, first home buyers would afford to purchase a home.

However, McDonald et al (2009, p.5) argues that first time buyers set conditions can result to financial crisis as a result of continued unemployment rates.

Bastiat main contributions to economics

The above author is portrayed as a champion of the harmony principle. However, this principle is not clearly understood. For instance, how it contradicts with views on the interaction of social phenomena.

The Magnum opus by Bastiat’s is labeled Economic Harmonies. Through the use of this book, he defends and develops the argument that the society members’ interests are harmonious just as the rights of the private property are respected amongst others (Bastiat 1964).

In addition to that, he believes that, un-tempered markets can independently operate without the intervention of the government. His central argument is easy to understand. He argues that, the free market economy cannot go against the interest of a specific population.

Furthermore,he intellectually argues that all proposals claimed that free markets antagonize some certain people or groups interests (Bastiat, 1851, p.3). Bastiat insight is confirmed by the economic history of the 20 th century. His insight was based on interventionists’ schemes common denominator.

When government intervenes, it acts on situations such as unemployment, business cycles, monopoly and public goods. The major challenge with the above named cases was argued to be failure of markets. The problems cannot be solved well by the market unlike the government.

Economic policy decisions that explains the above points

Economic policy is an action taken by the government in order to influence or control the behavior of the economy. Most of these policies are government administered and implemented.

Policy decisions revolve around government taxation and spending. In addition to that, it encompasses the income redistribution from the wealthy individuals to the poor people and also the general supply of money.

In an economic system characterized by free market, scarce resources are equitably distributed via price mechanism. In this case, consumer decisions and consumer preferences and business supply decisions join effort to agree on equilibrium prices.

Government intervention may play a role in price mechanism in order to reorganize resource allocation. This is done with an aim of achieving social welfare and economic improvement. In pursuit of political endeavors, the economy is intervened by the government in order to allocate resources that are scarce among uses that are competing.

In summary, the economy is intervened by government in various ways such as producing more services and goods such as national security, infrastructure and education.

In addition to that, incomes can be transferred both horizontally and vertically in the population. Similarly, the government can alter the taxation costs without interfering with its size (Labonte, 2010, p.1).

Index of Economic Freedom

The previous years have experienced a decline in global economic freedom. Globally, there has been increased tension between free market and government control. This is more experienced in countries that are developed.

The economic freedom gains have been tempered with as a result of uncontrolled government spending. However, Economic freedom plays a significant role in driving prosperity resulting to improved level of education, health and wealth.

Economic freedom by definition is the extent to which an individual can pursue their economic interest without government interference. In pursuit of one interests, an individual should ensure that his or her action do not violate others identical rights.

The index of economic freedom measures regulatory efficiency, government intrusiveness, market openness and rule of law. The three countries that have moved up the ranking are such as Australia, Mauritius and Iceland. Generally, there was improvement on seventy five economies.

However, ninety countries lost their economic freedom whilst fourteen never showed any significant change. Out of the seventy five economies that have shown great improvement, seventy three of them are categorized as emerging or developing countries.

Most of them are found in the Sub-Saharan Africa, Caribbean/ Central and South America and the Asian Pacific. The only two countries in the developed world that have shown great improvement are Iceland and Australia as indicated by the 2012 index.

This is as a result of these countries effort to control their government spending. Mauritius also greatly improved after coming in the top ten for the first time.

The three countries that have declined in terms of ranking are such as the United States, Denmark and Ireland. Ireland was ranked 9 th whilst the United States was ranked 10.

On the hand, despite Denmark rule of law that is strong and an efficient regulatory it dropped from top ten lists. This is as a result of its huge spending by the government which is similar to the approximately sixty percent of sum of domestic output and corresponding high burden of tax.

Australia is ranked number three with a score of eighty three point one (83.1). To further improve its position, the country needs to commit itself to the rule of law, reduced spending by governments, improve on its regulatory efficiency and advocate for open markets.

All these can act as an impressive flexibility in times of hard economic times (Miller et al, 2012, p.3).

Anonymous 2012 , The price system . Web.

Australian Institute of Health and Welfare 2008, ‘ Housing assistance in Australia’, cat. no. HOU 173 , Canberra.

Bastiat, F 1851, Harmonies economics , Guillaumin, Paris.

Bastiat, F 1964, Economic Harmonies . Van Nostrand, New York.

Bowman, Q 2009, Keynes economic theories re-emerge in government intervention policies . Web.

Costello, G 2006, ‘The Impact of Stamp Duty Reductions on Demand in the Perth Housing Market’, Pacific Rim Property Research Journal, vol. 12, no. 2, pp. 198-212.

Kasper, S 2002, The Revival of Laissez-Faire in American Macroeconomic Theory: A Case Study of Its Pioneers, Pearson. New York.

Keynes, J.M 1936, The General Theory of Employment, Interest and Money , Macmillan, London.

Labonte, M 2010, The size and role of government: Economic issues. Journal of Macroeconomic policy , vol 4 (2), pp.1-27.

Lombard, M 2010, ‘Government intervention in OECD member countries: Equity at the expence of efficiency’, Journal of Economic Society of Australia , vol 36 (5), pp.310-316.

Mayo, S.K 1981, ‘Theory and Estimation in the Economics of Housing Demand’, Journal of Urban Economics, vol. 10, pp. 96-116.

McDonald, G., Mullineux, A & Sensarma, R 2009, ‘Asymmetric effects of interest rate changes: the role of the consumption-wealth channel’, Applied Economics, Vol 56 (2), pp. 1-11.

Miller, T., Holmes, K.R, & Feuler, E.J 2012, ‘Highlights of the 2012 index of economic freedom : Promoting Economic opportunity and prosperity’, The Wall Street Journal , Vol 12, pp. 1-12.

Mind tools 2012, Supply and Demand Curves: Understanding price and quantity in the market place . Web.

Ng, Y.-K. 2000, Efficiency, Equality and Public Policy: With a Case for Higher Public Spending , Palgrave Macmillan, London.

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• Globalization in Friedman's "The World Is Flat"
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Guest Essay

Is This What Happens When You Build a Real Social Safety Net, Then Take It Away?

By Bryce Covert

Ms. Covert is a journalist who focuses on the economy, with an emphasis on policies that affect workers and families.

It’s a riddle that economists have struggled to decipher. The U.S. economy seems robust on paper, yet Americans are dissatisfied with it. But hardly anyone seems to have paid much attention to the whirlwind experience we just lived through: We built a real social safety net in the United States and then abruptly ripped it apart.

Take unemployment insurance. The CARES Act, passed in March 2020, included the largest increase in benefits and eligibility in American history. It offered people “a sense of relief,” said Francisco Díez, senior policy strategist for economic justice with the Center for Popular Democracy, which organized unemployed people in the pandemic. “A feeling like they could breathe and figure out what they could do.”

LaShondra White was one of them. When she was furloughed from her job at a Kohl’s department store in Detroit in March 2020, she started receiving more than $600 a week. It was “my chance to get out of this situation,” she told me last year , a situation in which her pay was “horrible.” She had always wanted to own her own business, so with the extra money she fixed her credit score, rented out a commercial space and opened an eyelash studio. Her studio is still open and largely booked.

In 2019, unemployment insurance kept 500,000 people out of poverty; in 2020, that figure was 5.5 million . Yes, the program was riddled with problems , particularly technological ones , that made it difficult for many people to get enrolled quickly. But once they were covered, “They saw something close to the actual level of benefits that they deserve,” Mr. Díez said.

It was short-lived. By July 2020, the extra $600 in benefits had lapsed , and it wasn’t until December 2020 that Congress approved $300 payments with new restrictions. By May, some states started opting out , leaving their residents with the paltry benefits they would have gotten prepandemic.

In those states, “There was a real sense of terror and concern and fear and abandonment from the politicians who chose to cut the benefits off early,” Mr. Díez said. “It really harms whatever faith they had in the nature of government as an institution that can actually see their struggle.”

Unemployment has been below 4 percent for more than two years , wage growth is outpacing inflation (which has fallen considerably), and economic output is booming . And yet consumer sentiment has been depressed, and even though it rose recently, it’s still about 20 percent lower than before the pandemic began. It’s at levels typically seen at the end of a recession.

Why are the economic vibes off? There are most likely many answers. Obtaining the basics, like housing or child care, has become more difficult . Falling inflation is great, but prices have remained uncomfortably high. Republican voters may just not like an economy run by a Democratic president. Americans may feel OK about today’s economy but wary of the future .

All of this can be true simultaneously, but let me add another reason Americans may be doing well but feeling financially insecure: In the pandemic, the country created the most robust safety net we had seen in decades, buffering people against eviction , poverty, hunger and other suffering. Americans’ lives were materially and appreciably improved. Then we took it all away.

The message received is that the government could have done these things all along but had chosen not to — and has chosen once again to withdraw that kind of security. Before March 2020, Americans were used to piecing a living together without much government help, but now they’ve seen that it doesn’t have to be that way. They’ve tried to create their own individual safety nets, but they’ve spent down the savings they were able to squirrel away when pandemic-era public programs were in place.

So even if people are more likely to have a job and even have gotten a raise that outpaces increased costs, they can still look down and see that there’s nothing to catch them if they fall. That puts us in a perpetual state of exhausting hustle. One wrong step, one misfortune, one layoff can mean catastrophe without supports to get you back on your feet. No wonder so many Americans don’t feel very confident.

Here’s an incomplete accounting of the safety net that was built nearly overnight to combat the aftershocks the pandemic sent through the economy. During the public health emergency, the federal government required states to keep anyone already on Medicaid or who signed up for it enrolled. That meant people were spared the difficulty of regularly recertifying that they were eligible, and it also meant their life circumstances could shift — they could earn slightly more or marry, for example — and they wouldn’t lose health insurance. More than 21 million people were added to Medicaid and the Children’s Health Insurance Program between February 2020 and December 2022.

Congress increased food stamps by raising benefits by 15 percent and bringing every household up to the maximum benefit for its size. It also allowed all students to get free school meals. Despite millions of people losing their jobs, hunger actually held steady in 2020 and 2021.

Congress approved $46.5 billion in rental assistance to prevent people from being evicted. For the first time in history , the federal government offered people who fell behind on rent help to get caught up. The money not only kept people more current on their rent but it also made it less likely they would experience “frequent debilitating anxiety,” according to a 2023 study of renters in Philadelphia.

In 2021 Congress expanded child tax credit payments, which were in place from July 2021 through the end of that year, by increasing the benefit to up to $300 a month for children under age 6 and $250 for older ones and expanding eligibility. These payments became an important part of households’ income and reduced hardships and hunger. They were responsible for nearly the entire halving of the child poverty rate in 2021.

Last year, Jamila Michener , a political scientist at Cornell, and Margaret Brower, a political scientist at the University of Washington, began a study asking people about the benefits they received during the pandemic.

“People can talk us through every benefit they got, what it meant to them, what they did with it,” Dr. Michener told me about the unpublished research. People became emotional as they described being able to feed their families. One woman told Dr. Michener how hard it was to have to constantly tell her children no, even to small snacks or healthy foods like fruit. But in the early part of the pandemic, she could buy them what they needed.

Crucially, Americans received multiple benefits at once — they were able to stay on Medicaid while also getting monthly child tax credit payments and making use of rental assistance. Most Americans aren’t usually tuned into various policy changes, but the magnitude and scope was different this time. They noticed and they were deeply grateful.

“People are able to breathe without as much pressure or stress,” Dr. Michener said.

After these overlapping supports were taken away, child poverty more than doubled , and family hunger spiked . So did evictions . Now that states are allowed to force people to complete paperwork to stay on Medicaid and kick them off if they fail, 17.8 million people have lost coverage.

It’s hit individuals and families hard. In Kentucky, a state that opted out of extra food stamp benefits in 2021, the damage started early. Residents told Dr. Michener they had to frequent food pantries to eat. One woman told her that when she wasn’t able to make it to pantries — because of a broken-down car, for instance — she would eat noodles even though she can’t eat gluten.

Many told Dr. Michener about having to hustle harder for work, and she told me that the word “struggle” comes up over and over again in the researchers’ interviews. Americans have less sense of security, she said, “that you’re going to be OK and you’re going to be taken care of should the worst-case scenario befall you.”

The disillusionment this creates is incredibly harmful. Yes, if people feel pessimistic about the economy, it may very well swing the election away from President Biden. But it’s bigger than just this election. Even if somehow the experience of losing benefits doesn’t diminish political participation, it’s a lost opportunity for the government to continue demonstrating to Americans that it can make their lives better. That draws people into democracy and strengthens it. The worst — and more likely — case is that it turns them off.

“There were a lot of things across many programs that changed and made people’s lives better, and so many of those things have been pulled back,” Dr. Michener said. “We’d have to think people are idiots not to notice that.”

Bryce Covert ( @brycecovert ) is a journalist who focuses on the economy, with an emphasis on policies that affect workers and families.

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The Philippines economy in 2024: Stronger for longer?

The Philippines ended 2023 on a high note, being the fastest growing economy across Southeast Asia with a growth rate of 5.6 percent—just shy of the government's target of 6.0 to 7.0 percent. 1 “National accounts,” Philippine Statistics Authority, January 31, 2024; "Philippine economic updates,” Bangko Sentral ng Pilipinas, November 16, 2023. Should projections hold, the Philippines is expected to, once again, show significant growth in 2024, demonstrating its resilience despite various global economic pressures (Exhibit 1). 2 “Economic forecast 2024,” International Monetary Fund, November 1, 2023; McKinsey analysis.

The growth in the Philippine economy in 2023 was driven by a resumption in commercial activities, public infrastructure spending, and growth in digital financial services. Most sectors grew, with transportation and storage (13 percent), construction (9 percent), and financial services (9 percent), performing the best (Exhibit 2). 3 “National accounts,” Philippine Statistics Authority, January 31, 2024. While the country's trade deficit narrowed in 2023, it remains elevated at $52 billion due to slowing global demand and geopolitical uncertainties. 4 “Highlights of the Philippine export and import statistics,” Philippine Statistics Authority, January 28, 2024. Looking ahead to 2024, the current economic forecast for the Philippines projects a GDP growth of between 5 and 6 percent.

Inflation rates are expected to temper between 3.2 and 3.6 percent in 2024 after ending 2023 at 6.0 percent, above the 2.0 to 4.0 percent target range set by the government. 5 “Nomura downgrades Philippine 2024 growth forecast,” Nomura, September 11, 2023; “IMF raises Philippine growth rate forecast,” International Monetary Fund, July 16, 2023.

For the purposes of this article, most of the statistics used for our analysis have come from a common thread of sources. These include the Central Bank of the Philippines (Bangko Sentral ng Pilipinas); the Department of Energy Philippines; the IT and Business Process Association of the Philippines (IBPAP); and the Philippines Statistics Authority.

The state of the Philippine economy across seven major sectors and themes

In the article, we explore the 2024 outlook for seven key sectors and themes, what may affect each of them in the coming year, and what could potentially unlock continued growth.

Financial services

The recovery of the financial services sector appears on track as year-on-year growth rates stabilize. 6 Philippines Statistics Authority, November 2023; McKinsey in partnership with Oxford Economics, November 2023. In 2024, this sector will likely continue to grow, though at a slower pace of about 5 percent.

Financial inclusion and digitalization are contributing to growth in this sector in 2024, even if new challenges emerge. Various factors are expected to impact this sector:

• Inclusive finance: Bangko Sentral ng Pilipinas continues to invest in financial inclusion initiatives. For example, basic deposit accounts (BDAs) reached $22 million in 2023 and banking penetration improved, with the proportion of adults with formal bank accounts increasing from 29 percent in 2019 to 56 percent in 2021. 7 “Financial inclusion dashboard: First quarter 2023,” Bangko Sentral ng Pilipinas, February 6, 2024.
• Digital adoption: Digital channels are expected to continue to grow, with data showing that 60 percent of adults who have a mobile phone and internet access have done a digital financial transaction. 8 “Financial inclusion dashboard: First quarter 2023,” Bangko Sentral ng Pilipinas, February 6, 2024. Businesses in this sector, however, will need to remain vigilant in navigating cybersecurity and fraud risks.
• Unsecured lending growth: Growth in unsecured lending is expected to continue, but at a slower pace than the past two to three years. For example, unsecured retail lending for the banking system alone grew by 27 percent annually from 2020 to 2022. 9 “Loan accounts: As of first quarter 2023,” Bangko Sentral ng Pilipinas, February 6, 2024; "Global banking pools,” McKinsey, November 2023. Businesses in this field are, however, expected to recalibrate their risk profiling models as segments with high nonperforming loans emerge.
• High interest rates: Key interest rates are expected to decline in the second half of 2024, creating more accommodating borrowing conditions that could boost wholesale and corporate loans.

Supportive frameworks have a pivotal role to play in unlocking growth in this sector to meet the ever-increasing demand from the financially underserved. For example, financial literacy programs and easier-to-access accounts—such as BDAs—are some measures that can help widen market access to financial services. Continued efforts are being made to build an open finance framework that could serve the needs of the unbanked population, as well as a unified credit scoring mechanism to increase the ability of historically under-financed segments, such as small and medium-sized enterprises (SMEs), to access formal credit. 10 “BSP launches credit scoring model,” Bangko Sentral ng Pilipinas, April 26, 2023.

Energy and Power

The outlook for the energy sector seems positive, with the potential to grow by 7 percent in 2024 as the country focuses on renewable energy generation. 11 McKinsey analysis based on input from industry experts. Currently, stakeholders are focused on increasing energy security, particularly on importing liquefied natural gas (LNG) to meet power plants’ requirements as production in one of the country’s main sources of natural gas, the Malampaya gas field, declines. 12 Myrna M. Velasco, “Malampaya gas field prod’n declines steeply in 2021,” Manila Bulletin , July 9, 2022. High global inflation and the fact that the Philippines is a net fuel importer are impacting electricity prices and the build-out of planned renewable energy projects. Recent regulatory moves to remove foreign ownership limits on exploration, development, and utilization of renewable energy resources could possibly accelerate growth in the country’s energy and power sector. 13 “RA 11659,” Department of Energy Philippines, June 8, 2023.

Gas, renewables, and transmission are potential growth drivers for the sector. Upgrading power grids so that they become more flexible and better able to cope with the intermittent electricity supply that comes with renewables will be critical as the sector pivots toward renewable energy. A recent coal moratorium may position natural gas as a transition fuel—this could stimulate exploration and production investments for new, indigenous natural gas fields, gas pipeline infrastructure, and LNG import terminal projects. 14 Philippine energy plan 2020–2040, Department of Energy Philippines, June 10, 2022; Power development plan 2020–2040 , Department of Energy Philippines, 2021. The increasing momentum of green energy auctions could facilitate the development of renewables at scale, as the country targets 35 percent share of renewables by 2030. 15 Power development plan 2020–2040 , 2022.

Growth in the healthcare industry may slow to 2.8 percent in 2024, while pharmaceuticals manufacturing is expected to rebound with 5.2 percent growth in 2024. 16 McKinsey analysis in partnership with Oxford Economics.

Healthcare demand could grow, although the quality of care may be strained as the health worker shortage is projected to increase over the next five years. 17 McKinsey analysis. The supply-and-demand gap in nursing alone is forecast to reach a shortage of approximately 90,000 nurses by 2028. 18 McKinsey analysis. Another compounding factor straining healthcare is the higher than anticipated benefit utilization and rising healthcare costs, which, while helping to meet people's healthcare budgets, may continue to drive down profitability for health insurers.

Meanwhile, pharmaceutical companies are feeling varying effects of people becoming increasingly health conscious. Consumers are using more over the counter (OTC) medication and placing more beneficial value on organic health products, such as vitamins and supplements made from natural ingredients, which could impact demand for prescription drugs. 19 “Consumer health in the Philippines 2023,” Euromonitor, October 2023.

Businesses operating in this field may end up benefiting from universal healthcare policies. If initiatives are implemented that integrate healthcare systems, rationalize copayments, attract and retain talent, and incentivize investments, they could potentially help to strengthen healthcare provision and quality.

Businesses may also need to navigate an increasingly complex landscape of diverse health needs, digitization, and price controls. Digital and data transformations are being seen to facilitate improvements in healthcare delivery and access, with leading digital health apps getting more than one million downloads. 20 Google Play Store, September 27, 2023. Digitization may create an opportunity to develop healthcare ecosystems that unify touchpoints along the patient journey and provide offline-to-online care, as well as potentially realizing cost efficiencies.

Consumer and retail

Growth in the retail and wholesale trade and consumer goods sectors is projected to remain stable in 2024, at 4 percent and 5 percent, respectively.

Inflation, however, continues to put consumers under pressure. While inflation rates may fall—predicted to reach 4 percent in 2024—commodity prices may still remain elevated in the near term, a top concern for Filipinos. 21 “IMF raises Philippine growth forecast,” July 26, 2023; “Nomura downgrades Philippines 2024 growth forecast,” September 11, 2023. In response to challenging economic conditions, 92 percent of consumers have changed their shopping behaviors, and approximately 50 percent indicate that they are switching brands or retail providers in seek of promotions and better prices. 22 “Philippines consumer pulse survey, 2023,” McKinsey, November 2023.

Online shopping has become entrenched in Filipino consumers, as they find that they get access to a wider range of products, can compare prices more easily, and can shop with more convenience. For example, a McKinsey Philippines consumer sentiment survey in 2023 found that 80 percent of respondents, on average, use online and omnichannel to purchase footwear, toys, baby supplies, apparel, and accessories. To capture the opportunity that this shift in Filipino consumer preferences brings and to unlock growth in this sector, retail organizations could turn to omnichannel strategies to seamlessly integrate online and offline channels. Businesses may need to explore investments that increase resilience across the supply chain, alongside researching and developing new products that serve emerging consumer preferences, such as that for natural ingredients and sustainable sources.

Manufacturing

Manufacturing is a key contributor to the Philippine economy, contributing approximately 19 percent of GDP in 2022, employing about 7 percent of the country’s labor force, and growing in line with GDP at approximately 6 percent between 2023 and 2024. 23 McKinsey analysis based on input from industry experts.

Some changes could be seen in 2024 that might affect the sector moving forward. The focus toward building resilient supply chains and increasing self-sufficiency is growing. The Philippines also is likely to benefit from increasing regional trade, as well as the emerging trend of nearshoring or onshoring as countries seek to make their supply chains more resilient. With semiconductors driving approximately 45 percent of Philippine exports, the transfer of knowledge and technology, as well as the development of STEM capabilities, could help attract investments into the sector and increase the relevance of the country as a manufacturing hub. 24 McKinsey analysis based on input from industry experts.

To secure growth, public and private sector support could bolster investments in R&D and upskill the labor force. In addition, strategies to attract investment may be integral to the further development of supply chain infrastructure and manufacturing bases. Government programs to enable digital transformation and R&D, along with a strategic approach to upskilling the labor force, could help boost industry innovation in line with Industry 4.0 demand. 25 Industry 4.0 is also referred to as the Fourth Industrial Revolution. Priority products to which manufacturing industries could pivot include more complex, higher value chain electronic components in the semiconductor segment; generic OTC drugs and nature-based pharmaceuticals in the pharmaceutical sector; and, for green industries, products such as EVs, batteries, solar panels, and biomass production.

Information technology business process outsourcing

The information technology business process outsourcing (IT-BPO) sector is on track to reach its long-term targets, with $38 billion in forecast revenues in 2024. 26 Khriscielle Yalao, “WHF flexibility key to achieving growth targets—IBPAP,” Manila Bulletin , January 23, 2024. Emerging innovations in service delivery and work models are being observed, which could drive further growth in the sector.

The industry continues to outperform headcount and revenue targets, shaping its position as a country leader for employment and services. 27 McKinsey analysis based in input from industry experts. Demand from global companies for offshoring is expected to increase, due to cost containment strategies and preference for Philippine IT-BPO providers. New work setups continue to emerge, ranging from remote-first to office-first, which could translate to potential net benefits. These include a 10 to 30 percent increase in employee retention; a three- to four-hour reduction in commute times; an increase in enabled talent of 350,000; and a potential reduction in greenhouse gas emissions of 1.4 to 1.5 million tons of CO 2 per year. 28 McKinsey analysis based in input from industry experts. It is becoming increasingly more important that the IT-BPO sector adapts to new technologies as businesses begin to harness automation and generative AI (gen AI) to unlock productivity.

Talent and technology are clear areas where growth in this sector can be unlocked. The growing complexity of offshoring requirements necessitates building a proper talent hub to help bridge employee gaps and better match local talent to employers’ needs. Businesses in the industry could explore developing facilities and digital infrastructure to enable industry expansion outside the metros, especially in future “digital cities” nationwide. Introducing new service areas could capture latent demand from existing clients with evolving needs as well as unserved clients. BPO centers could explore the potential of offering higher-value services by cultivating technology-focused capabilities, such as using gen AI to unlock revenue, deliver sales excellence, and reduce general administrative costs.

Sustainability

The Philippines is considered to be the fourth most vulnerable country to climate change in the world as, due to its geographic location, the country has a higher risk of exposure to natural disasters, such as rising sea levels. 29 “The Philippines has been ranked the fourth most vulnerable country to climate change,” Global Climate Risk Index, January 2021. Approximately $3.2 billion, on average, in economic loss could occur annually because of natural disasters over the next five decades, translating to up to 7 to 8 percent of the country’s nominal GDP. 30 “The Philippines has been ranked the fourth most vulnerable country to climate change,” Global Climate Risk Index, January 2021.

The Philippines could capitalize on five green growth opportunities to operate in global value chains and catalyze growth for the nation:

• Renewable energy: The country could aim to generate 50 percent of its energy from renewables by 2040, building on its high renewable energy potential and the declining cost of producing renewable energy.
• Solar photovoltaic (PV) manufacturing: More than a twofold increase in annual output from 2023 to 2030 could be achieved, enabled by lower production costs.
• Battery production: The Philippines could aim for a $1.5 billion domestic market by 2030, capitalizing on its vast nickel reserves (the second largest globally). 31 “MineSpans,” McKinsey, November 2023.
• Electric mobility: Electric vehicles could account for 15 percent of the country’s vehicle sales by 2030 (from less than 1 percent currently), driven by incentives, local distribution, and charging infrastructure. 32 McKinsey analysis based on input from industry experts.
• Nature-based solutions: The country’s largely untapped total abatement potential could reach up to 200 to 300 metric tons of CO 2 , enabled by its biodiversity and strong demand.

The Philippine economy: Three scenarios for growth

Having grown faster than other economies in Southeast Asia in 2023 to end the year with 5.6 percent growth, the Philippines can expect a similarly healthy growth outlook for 2024. Based on our analysis, there are three potential scenarios for the country’s growth. 33 McKinsey analysis in partnership with Oxford Economics.

Slower growth: The first scenario projects GDP growth of 4.8 percent if there are challenging conditions—such as declining trade and accelerated inflation—which could keep key policy rates high at about 6.5 percent and dampen private consumption, leading to slower long-term growth.

Soft landing: The second scenario projects GDP growth of 5.2 percent if inflation moderates and global conditions turn out to be largely favorable due to a stable investment environment and regional trade demand.

Accelerated growth: In the third scenario, GDP growth is projected to reach 6.1 percent if inflation slows and public policies accommodate aspects such as loosening key policy rates and offering incentive programs to boost productivity.

Focusing on factors that could unlock growth in its seven critical sectors and themes, while adapting to the macro-economic scenario that plays out, would allow the Philippines to materialize its growth potential in 2024 and take steps towards achieving longer-term, sustainable economic growth.

Jon Canto is a partner in McKinsey’s Manila office, where Frauke Renz is an associate partner, and Vicah Villanueva is a consultant.

The authors wish to thank Charlene Chua, Charlie del Rosario, Ryan delos Reyes, Debadrita Dhara, Evelyn C. Fong, Krzysztof Kwiatkowski, Frances Lee, Aaron Ong, and Liane Tan for their contributions to this article.

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