Understanding the interaction between fiscal policy and household savings since 2020

In 2020, governments in the United States and the euro zone ran huge fiscal deficits, which, in particular, allowed household purchasing power to continue to grow. But public health constraints reduced household consumption and public transfer payments were saved and not spent: the fiscal deficits did not stop activity from falling and gave rise to forced savings. Fiscal deficits remained very high in 2021 and households no longer had difficulty consuming. Consumption was therefore vigorous thanks to the public transfer payments, which led to a strong recovery in activity compared to 2020. The household savings rate returned to normal, which means that the forced savings of 2020 were not consumed. But in 2022, fiscal deficits will be reduced (sharply in the United States) and transfer payments to households will decrease, which will drive down real household income compared to 2021. A situation in 2022 symmetrical to that in 2020 would be one where households consumed their forced savings (the household savings rate would then become significantly below normal). Fiscal deficit reduction would then have no negative effect on activity, just as the increase in the fiscal deficit did not boost activity in 2020. But if households do not dissave and the household savings rate remains at its normal level, then fiscal deficit reduction will not be offset by additional consumption and will lead activity to fall between 2021 and 2022.