The COVID-19 crisis has revitalized the social contract. For how long?

Over the past year, since the onset of the COVID-19 crisis, governments across the world working together with the private sector in many countries have massively reinforced the economic safety net for their citizens. Deploying fiscal packages totaling more than $10 trillion in the G-20 countries alone, they have safeguarded employment at more or less full pay (in Europe) and sought to shield disposable income (in the United States), at a time when the economy as a whole was contracting sharply.

The interventions have supported access to basic goods and services and made them more affordable, for example by covering healthcare costs or limiting rent increases and providing forbearance for mortgage payments.

Taken together, such measures to protect individuals amount to a stunning revival of the economic aspects of the social contract, the arrangements and expectations, that govern how risks and gains are shared between individuals and institutions. Before the pandemic, MGI published research about economic outcomes for individuals in their roles as workers, consumers, and savers. It highlighted how institutions had tended to pull back in some areas, such as employment protection or guaranteed pensions, leaving individuals to shoulder more of the burden of their own outcomes.

The massive intervention during 2020 has reversed that trend, effectively reviving the social contract, at least for now. In the United States, for example, thanks to transfers and consumption-oriented measures, average real disposable income grew by 8% in the first two quarters of 2020 - even though real GDP dropped by 10%. In Europe, job retention schemes such as Kurzarbeit in Germany and chomage partiel in France have given employees financial security to survive the crisis by protecting their employment status. While real GDP declined by 14% between the fourth quarter of 2019 and the second quarter of 2020, the public sector covered a large proportion of the shortfall. Employment was shielded and declined by 3%.

In OECD countries overall, 50 million workers, or about one in four, were able to keep their jobs as a result. Although some of these schemes may have been used before, their scale during the pandemic has been unprecedented, with about ten times more workers covered now than during the 2008 global financial crisis.

Today, the vaccines are arriving, heralding a likely end to the health crisis over the next year or so. The economic scars may take longer to heal, however. And the critical question for policy-makers and business leaders is how to ensure that some of the positive benefits that the emergency intervention has had on individuals’ economic outcomes can be sustained in the future.

It won’t be easy, since the large-scale spending we have seen over the past year is likely not sustainable in the long term. In the 22 advanced economies we studied, governments increased fiscal spending as a percentage of GDP by an average of 20% in 2020 from 2019.

Countries such as the United States and the United Kingdom that were typically lower spenders on the social contract before the pandemic raised their expenditure by significantly more than economies such as Denmark, which previously had ranked among the higher spenders. In 2020 alone, governments in the European Union are expected to spend an additional around $2,300 per person compared to 2019, while in the United States, spending per person will be more than $6,500 higher.

Debt has soared as a result. On average, the 22 countries in our sample are expected to increase their gross debt position by 16 percentage points between 2019 and 2020 Continuing the current high level of spending and institutional intervention is thus likely to be only a relatively short-term option for many.

Yet a return to the social contract as it was before COVID-19, that is, a swinging back of the pendulum, is not a desirable outcome.

It is possible that the end of the health crisis will usher a new period of rapid gains in economic and productivity growth achieved through business dynamism, investment, technology, and continued focus on jobs growth. Even then, such a scenario could resurface the many questions and rekindle the many vulnerabilities that were already becoming apparent before the pandemic struck—and to which the public and the private sector alike have not yet found lasting responses.

Moreover, many of the most economically vulnerable groups before the pandemic — low-income workers, younger generations, women, and minorities — were hit hardest by the economic consequences of COVID-19 and are likely to require additional support to return to a stable economic situation of their household.

It will be important to draw lessons from the 2020 response to the pandemic and look at how to make at least some of the key improvements to the social contract durable fixtures. Even with government spending brought back down to make it more sustainable, the interventions could be better targeted at the most vulnerable. Ideally, there would be a more substantial and systemic role for the private sector. For example, enabling the provision of critical goods and services, such as housing and childcare, at affordable prices may be more cost-effective for the social contract than aiming to stabilize incomes. The right financial infrastructure, including digital identification, payment channels, and data would also help target the most vulnerable groups, reduce fraud, and improve the efficiency of support programmes.

We all have much to learn from this pandemic. Harnessing the energy, speed, and inventiveness with which governments intervened and focusing them on solutions to long-standing social problems could be one of the key lessons.