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### Introduction — Fiscal response overview
- Fiscal measures announced as of September 11, 2020, are estimated at $11.7 trillion globally, or close to 12 percent of global GDP.
- Half of these measures have consisted of additional spending or forgone revenue, including temporary tax cuts; the other half liquidity support, including loans, guarantees, and equity injections by the public sector.
- Size and composition of fiscal support varied vastly by country, reflecting in part countries’ available fiscal space.
- Advanced economies and large emerging markets account for the bulk of the global fiscal response for three reasons:
  - They were hit earlier and harder by the health crisis.
  - Their central banks were able to provide massive monetary stimulus and purchase government or corporate securities while retaining credibility to deliver low inflation.
  - Their treasuries were able to finance larger deficits at low interest rates.
- The fiscal response in low-income developing countries has largely been on budget and smaller because of tighter financing constraints.

### Debt outlook and financing
- The fiscal response, coupled with the sharp decline in output and government revenue, will push public debt to levels close to 100 percent of GDP in 2020 globally, the highest ever.
- Central banks in several advanced economies and emerging market and middle-income economies have facilitated the fiscal response by directly or indirectly financing large portions of their country’s debt buildup.
- In low-income developing countries, financing constraints have been modestly alleviated by debt relief and concessional financing from the official sector.
- Total private and public debt in the Group of Twenty (G20) reached almost 240 percent of GDP at the end of 2019, with private debt increasing steadily from 2014 to almost 150 percent of GDP at the end of 2019.
- The long-term decline in borrowing costs and the expectation that interest rates will remain low has moderated debt-service burdens relative to GDP.
- Governments have taken advantage of the interest rate decline to gradually extend the maturity of government bonds.
- 54 percent of low-income countries were deemed to be in debt distress or at high risk of debt distress as of September 2020, up from 51 percent at the end of 2019.

### Impacts and trade-offs of support measures
- The massive fiscal support undertaken since the start of the COVID-19 crisis has saved lives and livelihoods.
- Public health policies that contained the spread of the disease were effective because they also supported the recovery by restoring confidence and permitting a safe reopening of activity.
- Cash transfers were vital for the poor, who spent them largely on necessities.
- Unemployment benefits supported consumption for people who lost their main source of income.
- Short-term essential policies may have long-term implications:
  - Wage subsidies preserved jobs and worker-firm relations but may slow labor market reallocation when new vacancies emerge.
  - Temporary tax deferrals and cuts have supported liquidity, but there is a risk they will become permanent, at the expense of government revenues.
  - Equity injections have often been necessary to prevent bankruptcies, particularly in hard-hit strategic firms, but could delay sectoral reallocation.
- Direct or guaranteed loans have had low take-up so far; ultimate impact depends on take-up and future repayment.

### Fiscal strategy through pandemic phases (phase taxonomy)
- Fiscal policy must adapt across three pandemic phases:
  1. outbreak with lockdowns;
  2. partial reopening;
  3. high degree of control with medical advances.
- At the time of writing (September 2020), most countries are in phase 2, though several remain in phase 1.
- Short-term: respond to the immediate health crisis.
- Medium-term: foster economic recovery while managing the pace of reducing lifelines to avoid an excessive increase in debt.
- Long-term: exit from exceptional government interventions, ensure sustainability of public finances, build resilience against future shocks, and address preexisting challenges such as inequalities and global warming.
- Record-high public debt levels limit the room for further fiscal support, particularly in countries where borrowing costs or access to financing impose constraints.
- Fiscal policy will have to “deliver more with less,” emphasizing careful design, implementation, innovation, and flexibility.

### Fiscal developments and the outlook: key metrics and dynamics
- Discretionary fiscal support is measured as the change in the cyclically adjusted primary balance; nondiscretionary fiscal support is the residual.
- Nondiscretionary items (mainly automatic declines in tax revenues and surges in expenditures such as unemployment benefits) are projected to account for one-third of general government deficits of the G20 in 2020.
- In advanced economies the projected economic contraction in 2020 will add 7 percentage points to the ratio of general government debt to GDP.
- Under current projections, the public debt ratio is expected to stabilize in 2021 (except in China and the United States), spurred by a strong rebound in economic activity projected in the baseline, against a backdrop of stable and low interest rates.
- Forecast revisions: projected increases in countries’ debts and deficits have been revised upward since the beginning of the year; more fiscal actions are likely as policymakers respond to ongoing uncertainty.

### Advanced economies: magnitude and composition
- In 2020, headline fiscal deficits in advanced economies are expected to be over four times higher (in percent of GDP) than in 2019.
- Double-digit increases are projected in the overall-deficit-to-GDP ratio in one third of advanced economies.
- Canada and the United States lead the group, with anticipated budget deficits of almost one-fifth of their GDP in 2020.
- Medians of projected changes (relative to 2019 GDP): real increase in spending 4.5 percentage points; real decrease in revenue 3.5 percentage points.
- Advanced economies provided unprecedented off-budget assistance in the form of liquidity support and guarantees.
- Average general government debt for advanced economies is projected to reach 126 percent of GDP in 2020.
- Compared with 2019, general government debt is projected to increase close to 30 percentage points of GDP in Italy, Japan, and Spain, and more than 20 percentage points of GDP in the United States.

### Emerging market and middle-income economies: doing more with less
- Overall fiscal deficit in emerging market and middle-income economies is projected to widen by about 6 percentage points of GDP in 2020 compared with 2019—almost half as large as the increase in advanced economies.
- Budget balance effects: oil exporters weaken by about 7 percentage points of GDP; non–oil exporters by 6 percentage points of GDP.
- Projected median revenue decrease about 3½ percentage points of 2019 GDP; projected expenditure increase more than 1 percentage point of 2019 GDP.
- Average revenues relative to GDP are projected to increase 0.7 percentage point of GDP in 2021, though remain below pre-pandemic levels.
- Notable country increases in debt ratios: Brazil 12 percentage points; India 17 percentage points; South Africa 17 percentage points.
- Among oil exporters, projected increases include Ecuador 17 percentage points, Oman 18 percentage points.
- Saudi Arabia: oil-related revenues fell by almost 7 percentage points of GDP; authorities pared back spending on wage allowances to civil servants, increased customs duties, and tripled the VAT rate to 15 percent.

### Fiscal responses and aggregate outcomes (global averages)
- Global fiscal support expanded by 5.6 percentage points of GDP on average.
- Average general government debt in emerging market and middle-income economies is expected to increase to more than 62 percent in 2020 from 53 percent in 2019.
- For oil-exporting countries, the average fiscal deficit is projected to widen by 7 percentage points of GDP.
- The expected median fall in real revenues for oil exporters is 5 percentage points of 2019 GDP; median real change in expenditures close to zero.

### Financing considerations and market access
- Financing constraints have likely tempered fiscal responses in emerging market and middle-income economies relative to advanced economies.
- Demand for short-term local currency debt is weak among this group; investment-grade emerging markets can issue long-term debt in foreign currency.
- Following the US Federal Reserve’s announcement of open-ended asset purchases in late March, Eurobond issuance by emerging markets rose to US$140 billion in the first half of 2020 compared with US$95 billion in 2019.
- Several emerging market central banks introduced or boosted purchases of government debt through quantitative easing (Croatia, Indonesia, Philippines, Poland, Turkey) with amounts far lower as a share of GDP than in advanced economies.
- Other financing actions: tap extrabudgetary funds or sovereign wealth funds (Chile, India, Russia); raise fuel excise taxes (India); impose a digital tax on foreign firms (Indonesia); increase the VAT rate (Saudi Arabia).

### Low-income developing countries: constrained by financing
- Headline deficit projected to widen by more than 2 percentage points of GDP in 2020 compared with 2019.
- Some countries face primary deficit widenings of 6 percentage points or more (Republic of Congo, Ghana, Kyrgyz Republic, Moldova, Mozambique).
- Other countries project cuts in primary expenditures (Democratic Republic of the Congo, Sudan, Timor-Leste, Zambia).
- In real terms, almost half of low-income developing countries are projected to cut total spending; about 60 percent are expected to cut capital spending in 2020 from 2019 levels.
- Revenues of oil exporters in real terms projected to decline, on average, by 15 percent; non–oil exporters by 9 percent on average.
- Several countries’ real revenues projected to increase by more than 5 percent (Burkina Faso, Chad, Haiti, Niger, Senegal) driven by grants.
- Debt service relative to tax revenues will exceed 20 percent in over half of low-income developing countries in 2020 and 2021.
- Commercial credit as a percentage of external low-income developing country debt rose from less than 8 percent to more than 19 percent from 2010 to 2018.
- Projected disbursements from multilateral development banks to countries eligible for IDA 19 (plus Angola) from April to December 2020 amount to US$45 billion—more than six times the total debt service (US$7 billion).
- More than half of low-income developing countries are now in debt distress or at high risk of debt distress.

### Off-budget, quasi-fiscal measures, and state-owned enterprises
- Off-budget and quasi-fiscal measures could add to fiscal vulnerabilities.
- State-owned enterprises engaged in greater lending to companies and households (Brazil) or quasi-fiscal operations such as temporarily reducing electricity tariffs or waiving port fees (China).
- Examples: use of sovereign wealth funds (Russia’s National Welfare Fund resources offset a decline in government oil revenues as established in the fiscal rule); equity injections in specific sectors.

### Assessment of fiscal policy design and effectiveness
- April 2020 Fiscal Monitor recommended large, timely, temporary, and targeted fiscal support for people and viable firms, including informal sectors.
- Many governments deployed large and timely measures; timeliness often came at the expense of targeting, and durations were often extended because of continued lockdowns.
- Countries that implemented strong containment measures such as mobility restrictions before total cases reached 100 ultimately deployed smaller fiscal packages.
- Fiscal support was larger for countries with higher income per capita.
- Countries with initially high sovereign bond spreads deployed smaller on-budget support; those with initially high public debt deployed larger off-budget support.
- Fiscal measures helped mitigate health and economic fallout more so in advanced economies where average fiscal support has been larger.

### Poverty, inequality, and distributional impacts
- Based on projected declines in per capita incomes (June 2020 World Economic Outlook Update), 100 million to 110 million people globally are expected to enter extreme poverty relative to the pre-COVID projection.
- Additional social assistance is expected to have a modest impact, containing the increase to 80 million to 90 million.
- The pandemic’s impact would be concentrated largely in emerging market and developing economies in sub-Saharan Africa and South Asia.
- Income inequality within countries is expected to increase as the pandemic affects low-income individuals disproportionately.

### Fiscal response patterns and country preconditions
- Countries that swiftly put in place stronger containment measures ultimately deployed smaller fiscal packages.
- Total fiscal support was larger for countries with higher income per capita.
- Countries with initially high sovereign bond spreads deployed less on-budget support.
- Countries with initially high public debt levels deployed more off-budget support.

### Health preparedness costs and implications
- Estimates: increasing intensive-care capacity by one-fifth (excluding capital costs) and testing capacity to twice per individual in a year would cost between 0.3 and 0.5 percent of GDP in selected advanced economies (G7, Korea, Spain).
- Capital and recurrent costs of strengthening pandemic preparedness are likely higher in emerging market and developing economies with weaker health systems.

### Social assistance, transfers, and poverty outcomes
- Additional social assistance has helped mitigate the potential increase in global poverty.
- Global Extreme Poverty Rate (percent of total population):
  - 2018: 8.9
  - 2020 estimate before COVID-19: 9.3
  - COVID-19 health crisis effect: –0.8
  - Additional social assistance effect: 1.4
  - 2020 estimate after COVID-19: –0.3
- Cash transfers particularly effective in protecting the poor; United Kingdom increase in means-tested universal credit allowance estimated to fully offset adverse impact on poverty.
- United States: higher-income households receiving “stimulus checks” spent less than lower-income households.
- Unemployment benefits found more effective than “stimulus checks” in reaching households with higher propensity to consume additional resources.
- In emerging market and developing economies with large informal sectors, cash and in-kind transfers provided better coverage than unemployment benefits.
- Examples of rapid expansion: India, Togo, Turkey (cash benefits); Nepal, Rwanda (in-kind food assistance).
- Latin America: expansion of safety nets improved coverage of structurally poor but often failed to reach temporarily vulnerable informal lower-middle-income workers.

### Employment measures and job retention
- Wage subsidies effective in preserving employment links but risk delaying labor reallocation if maintained too long after reopenings.
- Take-up of job retention schemes:
  - Averaged one-quarter of employees in OECD economies.
  - Exceeded half of employees in two cases (France, New Zealand).
- Denmark: firms reported fewer job separations because of strong wage subsidy take-up.
- Headline unemployment rates increased less in economies channeling more labor market support through wage subsidies (Australia, United Kingdom) than through unemployment benefits (Canada, United States).
- About one-fifth of persons enrolled in short-time work schemes in the five largest European economies are in hard-hit sectors and face elevated risk of unemployment when support is phased out.
- About one-third of pandemic-induced firm-level layoffs in the United States are estimated to be permanent.
- Overextended job retention schemes and overly generous unemployment benefits could delay necessary job reallocations.

### Liquidity, credit support, and firm solvency measures
- Loans and guarantees aimed to provide liquidity, but many countries report low take-up (Germany, Italy, United Kingdom).
- Low take-up drivers: administrative constraints, conditionality, private debt overhang, elevated uncertainty, complex program design.
- United States Paycheck Protection Program: initially low take-up; modest effect on employment in small businesses because less-affected businesses primarily received loans.
- United Kingdom SME support: Bounce Back Loan Scheme had 20 times more SME loans than Coronavirus Business Interruption Loan Scheme.
- Banks in the euro area reported government guarantees helped keep credit standards favorable for SMEs.
- Equity injections used to prevent bankruptcies of hard-hit strategic firms (for example, national airlines); some governments provided convertible loans (New Zealand, Singapore); France combined airline support with conditionality on cutting emissions.
- Tax measures primarily consisted of deadline extensions and payment deferrals; other actions include tariff waivers (Colombia, Vietnam), quick customs procedures (Philippines), accelerated VAT refunds (France, Indonesia), loss carryback rules (China, New Zealand, Japan), accelerated depreciation deductions (Australia), reduced social security contributions (Argentina, China, France, Korea).
- Payment forbearance policies provided short-term relief: mortgage moratoriums (United States), utilities (Argentina, Colombia, Japan), rents (China), loans (Argentina, Turkey).

### Magnified fiscal risks
- Major fiscal risks:
  - A protracted economic downturn could lead to more bankruptcies, bank balance sheet deterioration, greater fiscal support needs, and reallocation of budget resources away from firms that are no longer viable.
  - Tightening of financial conditions: rapid growth in sovereign and private debt stocks raises exposure to changes in financing conditions; abrupt market tightening could spike borrowing costs; local currency depreciation would increase debt costs for foreign-currency debt holders; low-income developing countries face compounding debt servicing problems.
  - Commodity market volatility: a sharp fall in oil prices would further undermine budgets of oil exporters but could relieve importers.
  - Contingent liabilities: guarantees and other contingent liabilities could be called in an adverse scenario, adding substantially to debt vulnerabilities.
- Upside risks: rapid development and distribution of a safe, affordable, effective vaccine; productivity-boosting structural changes; faster-than-expected normalization in reopened areas.

### Fiscal roadmap and phase-specific strategies (priority guidance)
- Priority: bring the pandemic under control—develop vaccines and treatments and ensure universal low-cost access; multilateral coordination and financial support for developing economies are vital.
- Ensure full transparency, good governance, and costing of all fiscal measures throughout.
- Phase 1 (Widespread Lockdowns) guidance:
  - Accommodate additional health and emergency services; provide lifelines to affected people and firms.
  - Measures include wage subsidies, unemployment benefits, deferred tax collection, subsidized loans, loan guarantees.
  - Use all tools: expand social protection (including for informal workers) and financing for SMEs (for example, through public banks).
  - Complement fiscal measures with central bank/regulatory actions (for example, delaying bankruptcies or evictions).
- Phase 2 (Gradual Reopening) guidance:
  - Direct resources to intensive testing and tracing, localized mobility restrictions, and real-time risk assessment.
  - Maintain flexibility; avoid removing support too fast.
  - For countries with fiscal space, accelerate job-intensive public investments (maintenance, public works).
  - Where fiscal space is limited, prioritize enhanced safety nets and reopening measures (safe work environments, job matching, help for viable firms).
  - Revenue-enhancing options: increase tax compliance and progressivity; modernize business taxation; capture windfall profits; consider progressive taxes on high incomes, capital income, property, or wealth; reduce fuel subsidies or raise fuel taxes where appropriate.
  - Phase out exceptional support as health risks diminish: reduce job retention programs, reintroduce job search requirements, scale up online training and hiring incentives, link unemployment benefits to local unemployment rates, introduce enhanced automatic stabilizers.
- Phase 3 (Pandemic under Control) guidance:
  - Promote an inclusive and green recovery, structural transformation, unwind interventions, and tackle higher corporate and public debt.
  - Rebuild fiscal buffers over the medium term; avoid tightening too fast.
  - Country-specific stance:
    - Countries with fiscal space and deeper scarring: temporary expansionary measures and slower deficit reduction may be appropriate.
    - Countries with limited fiscal space: reduce fiscal deficits faster to prevent debt distress or rising borrowing costs.
  - Economies with large foreign-currency government debt require more cautious fiscal stance due to currency depreciation risks.
  - International cooperation and debt relief initiatives (for example, the Debt Service Suspension Initiative) including private sector participation are critical for recovery and achieving the SDGs.

### Selective support to firms and SMEs on reopening
- Support should be more selective to limit costs and avoid distorting competition; prioritize otherwise viable firms impaired by health risks or firms crucial for economy functioning.
- Risk-sharing with investors and creditors recommended to limit fiscal costs.
- Liquidity support (loans and guarantees) can be extended but generosity should be reduced (partial guarantees, tighter conditions).
- Solvency support should prioritize systemic firms; government support should include conditions (caps on executive compensation, bans on dividends and share buybacks) and could be in exchange for equity participation.
- SME measures:
  - Temporary debt repayment moratoria or temporary suspension of insolvency rules (examples: Egypt, Ghana, Kazakhstan).
  - Securitizing SMEs’ debt with government guarantees (Portugal); government buying securitized SME debt (Australia); equity or hybrid instruments (convertible bonds).
  - Channel support to informal-sector SMEs through micro-credit institutions and informal sector organizations; provide grants or guarantees; temporary relief on payments such as rent and utilities.
  - Accompany SME measures with direct support to informal workers where relevant.

### Stimulus measures: cost-effectiveness and instrument choice
- Temporary fiscal stimulus can have a powerful multiplier effect as supply disruptions diminish, particularly in low interest-rate environments.
- High public debt levels and precautionary savings could reduce multipliers.
- Instrument impacts:
  - Targeted transfers and income tax cuts for low-wage workers boost consumption in poorest households and yield higher short-term multipliers.
  - Temporary accelerated depreciation or investment tax credits can encourage frontloading of private investment.
  - Active labor market policies (including retraining) support reallocation to more productive formal jobs.
- For countries with limited space to borrow, combine instruments to protect vulnerable households while containing public debt (for example, targeted transfers financed by progressive taxes implemented later or immediately, or financing public investment with higher indirect taxes).

### Unwind government interventions in the corporate sector
- Priority to unwind large public interventions and manage associated fiscal risks as recovery proceeds.
- Need effective debt resolution systems: streamlined restructuring frameworks and institutional capacity to manage large numbers of bankruptcies.
- Governments, as major creditors for SMEs, can facilitate debt restructuring but must accept losses from unpaid taxes and pandemic-era loans; restructuring should be authorized by legislation and ensure accountability and transparency.
- Note: government ownership tends to be associated with weaker firm performance and can distort competition.

### Recovery goals: inclusivity and greening
- Recovery presents opportunity to invest in human and physical capital, make economies more resilient, address poverty and inequality, and tackle climate change.
- Fiscal levers to promote inclusivity and reduce inequality: progressive income taxation and education and health spending.
- Reorient expenditures toward investment in people and raise equitable revenues to ensure the post-pandemic economy is more inclusive and green.

### Private sector debt vulnerabilities and implications for fiscal policy
- Nonfinancial corporate and household debt reached almost 150 percent of GDP in 2019.
- Private debt exceeded public debt by a large margin in most G20 countries.
- Corporate speculative-grade debt shares were nearly 50 percent in China and the United States and even higher in Italy and the United Kingdom.
- Capital-raising in H1 2020: $5.4 trillion secured by companies globally, including $3.9 trillion since the start of March.
- Historical support to financial institutions after global financial crisis: cumulative gross support in 37 countries was $3.5 trillion.
- Governments announced guarantee programs equivalent to $3.8 trillion in response to the pandemic.
- Fiscal action may ultimately be required to help repair private balance sheets; rapid, equitable bankruptcy procedures and reconsideration of tax policies that encourage debt (for example, interest deductibility) are policy implications.

### Greening the fiscal response and investment priorities
- Initial assessment: little of the fiscal response to date has been "green."
- Greenness varied across the G20: France allocated almost 1 percent of GDP to green measures; many countries had no climate-positive measures or had significant climate-negative measures.
- Green measures have mainly been direct budget expenditures, loans and grants for green investments, and investments in climate-resilient infrastructure.
- Negative measures have largely been bailouts (for example, airlines in Brazil, China, France); only France attached significant green conditionality to its bailout to date.
- Recommendations:
  - Implement more robust carbon pricing.
  - Reduce subsidies or tax incentives for emissions-intensive activities.
  - Invest in clean energy infrastructure to create jobs and crowd in private investment.
  - Undertake and publish climate impact assessments and introduce green budgeting.

### Size and composition of fiscal responses (as of September 11, 2020)
- Countries announced discretionary fiscal measures averaging close to 12 percent of GDP.
- Advanced economies:
  - Direct budget support committed is equivalent to 9.3 percent of GDP.
  - Another 11 percent of GDP committed to liquidity support (equity injections, loans, guarantees, quasi-fiscal activities).
- Emerging market and middle-income economies:
  - Total fiscal support amounts to about 6 percent of GDP, 3.5 percentage points of which is committed on budget.
  - Public sector equity injections, loans, and guarantees have been modest on average, exceeding 5 percent of GDP in only a few cases (Brazil, Peru, Turkey).
- Low-income developing countries:
  - Total fiscal support announced is 1.8 percent of GDP, largely through budgetary measures.
  - Spending on health services has amounted to 0.3 percent of GDP.
  - Large share of support allocated to protecting households through cash and in-kind transfers, temporary unemployment benefits, and utility subsidies.

*International Monetary Fund | October 2020*

### Introduction

### Introduction

### Fiscal response overview
- Fiscal measures announced as of September 11, 2020, are estimated at $11.7 trillion globally, or close to 12 percent of global GDP.
- Half of these measures have consisted of additional spending or forgone revenue, including temporary tax cuts; the other half liquidity support, including loans, guarantees, and equity injections by the public sector.
- Size and composition of fiscal support varied vastly by country, reflecting in part countries’ available fiscal space.
- Advanced economies and large emerging markets account for the bulk of the global fiscal response for three reasons:
  - They were hit earlier and harder by the health crisis.
  - Their central banks were able to provide massive monetary stimulus and purchase government or corporate securities while retaining credibility to deliver low inflation.
  - Their treasuries were able to finance larger deficits at low interest rates.
- The fiscal response in low-income developing countries has largely been on budget and smaller because of tighter financing constraints.

### Debt outlook and financing
- The fiscal response, coupled with the sharp decline in output and government revenue, will push public debt to levels close to 100 percent of GDP in 2020 globally, the highest ever.
- Central banks in several advanced economies and emerging market and middle-income economies have facilitated the fiscal response by directly or indirectly financing large portions of their country’s debt buildup.
- In low-income developing countries, financing constraints have been modestly alleviated by debt relief and concessional financing from the official sector.
- Total private and public debt in the Group of Twenty (G20) reached almost 240 percent of GDP at the end of 2019, with private debt increasing steadily from 2014 to almost 150 percent of GDP at the end of 2019.
- The long-term decline in borrowing costs and the expectation that interest rates will remain low has moderated debt-service burdens relative to GDP.
- Governments have taken advantage of the interest rate decline to gradually extend the maturity of government bonds.
- 54 percent of low-income countries were deemed to be in debt distress or at high risk of debt distress as of September 2020, up from 51 percent at the end of 2019.

### Impacts and trade-offs of support measures
- The massive fiscal support undertaken since the start of the COVID-19 crisis has saved lives and livelihoods.
- Public health policies that contained the spread of the disease were effective because they also supported the recovery by restoring confidence and permitting a safe reopening of activity.
- Cash transfers were vital for the poor, who spent them largely on necessities.
- Unemployment benefits supported consumption for people who lost their main source of income.
- Some short-term essential policies may have long-term implications:
  - Wage subsidies preserved jobs and worker-firm relations but may slow labor market reallocation when new vacancies emerge.
  - Temporary tax deferrals and cuts have supported liquidity, but there is a risk they will become permanent, at the expense of government revenues.
  - Equity injections have often been necessary to prevent bankruptcies, particularly in hard-hit strategic firms, but could delay sectoral reallocation that is crucial for the recovery.
- Direct or guaranteed loans have had low take-up so far, partly reflecting administrative constraints and conditionality as well as the private debt overhang; their ultimate impact depends on further take-up and future repayment.

### Fiscal strategy through pandemic phases
- Fiscal policy will need to adapt as countries proceed through different phases of the pandemic:
  1. outbreak with lockdowns;
  2. partial reopening;
  3. high degree of control with medical advances.
- At the time of writing (September 2020), most countries are in phase 2, though several remain in phase 1.
- Short-term: respond to the immediate health crisis.
- Medium-term: foster economic recovery while managing the pace of reducing lifelines to avoid an excessive increase in debt.
- Long-term: exit from exceptional government interventions, ensure sustainability of public finances, build resilience against future shocks, and address preexisting challenges such as inequalities and global warming.
- Record-high public debt levels limit the room for further fiscal support, particularly in countries where borrowing costs or access to financing impose constraints.
- Fiscal policy will have to “deliver more with less,” emphasizing careful design and implementation and innovation and flexibility to address deep scars from the crisis (large rises in unemployment, public and corporate debt, bankruptcies).

### Fiscal developments and the outlook: Doing whatever it takes
- Sizable discretionary support, along with a sharp contraction in output and an ensuing fall in revenues, has led to a surge in government debt and deficits.
- Discretionary fiscal support is measured as the change in the cyclically adjusted primary balance; nondiscretionary fiscal support is the residual.
- Nondiscretionary items (mainly automatic declines in tax revenues and surges in expenditures such as unemployment benefits) are projected to account for one-third of general government deficits of the G20 in 2020.
- In advanced economies the projected economic contraction in 2020 will add 7 percentage points to the ratio of general government debt to GDP (as negative economic growth results in r − g > 0).
- Under current projections, the public debt ratio is expected to stabilize in 2021 (except in China and the United States), spurred by a strong rebound in economic activity projected in the baseline, against a backdrop of stable and low interest rates.
- Forecast revisions: projected increases in countries’ debts and deficits have been revised upward since the beginning of the year; more fiscal actions are likely as policymakers respond to ongoing uncertainty.

### Advanced economies: fiscal policy on the front line
- In 2020, headline fiscal deficits in advanced economies are expected to be over four times higher (in percent of GDP) than in 2019.
- Double-digit increases are projected in the overall-deficit-to-GDP ratio in one third of advanced economies.
- Canada and the United States lead the group, with anticipated budget deficits of almost one-fifth of their GDP in 2020.
- The medians of the projected real increase in spending and real decrease in revenue are 4.5 and 3.5 percentage points of 2019 GDP, respectively.
- Spending increases and revenue decreases almost equally drive the deficit expansions in advanced economies.
- Advanced economies have also provided unprecedented off-budget assistance in the form of liquidity support and guarantees to firms that do not have a direct effect on current budget deficits.
- Central bank measures in some advanced economies included purchases of corporate bonds and commercial paper, and potentially quasi-fiscal activities such as participation in bank loans to corporations or purchase of corporate bonds in primary or secondary markets.
- Many advanced economies announced additional fiscal packages over the summer blending continued support for those most affected with broader fiscal stimulus for nascent recoveries.
- Recovery packages included support for innovation, training, green growth, and expanded digital infrastructure in various countries.
- The average general government debt for advanced economies is projected to reach 126 percent of GDP in 2020.
- Compared with 2019, general government debt is projected to increase close to 30 percentage points of GDP in Italy, Japan, and Spain, and more than 20 percentage points of GDP in the United States.

### Emerging Market and Middle-Income Economies: doing more with less
- In emerging market and middle-income economies, the overall fiscal deficit is projected to widen by about 6 percentage points of GDP in 2020 compared with 2019—almost half as large as the increase in advanced economies.
- On average, the budget balance for oil exporters is expected to weaken by about 7 percentage points of GDP and the balance for non–oil exporters by 6 percentage points of GDP.
- Unlike in advanced economies, revenue drops contribute considerably more to the deficit increase: the projected median revenue decrease is about 3½ percentage points of 2019 GDP and the projected expenditure increase is more than 1 percentage point of 2019 GDP.
- Average revenues relative to GDP are projected to increase 0.7 percentage point of GDP in 2021, though they will remain below pre-pandemic levels.
- Among non–oil exporters, deficit increases are pronounced in Brazil (almost 11 percentage points of GDP) and South Africa (almost 8 percentage points of GDP), with COVID-19-related discretionary fiscal measures contributing more than 8 and 5 percentage points of GDP, respectively.
- China’s deficit is projected to increase because of support and stimulus measures.

*Source: ch1 - Introduction (chapter PDF).*

### CHAPTER 1 FISCAL POLICIeS TO ADDReSS The COvID-19 PANDeMIC

### CHAPTER 1 FISCAL POLICIeS TO ADDReSS The COvID-19 PANDeMIC

### Fiscal responses and aggregate outcomes
- Global fiscal support expanded by 5.6 percentage points of GDP on average, somewhat less than in the aftermath of the global financial crisis (Figure 1.10, panel 2).
- Average general government debt in emerging market and middle-income economies is expected to increase to more than 62 percent in 2020 from 53 percent in 2019, driven by both fiscal measures and economic contraction.
- Among large non–oil exporters, projected increases in debt ratios are: Brazil 12 percentage points, India 17 percentage points, South Africa 17 percentage points (Table 1.2).
- Among oil exporters, projected increases in debt ratios include: Ecuador 17 percentage points, Oman 18 percentage points.
- For oil-exporting countries, the average fiscal deficit is projected to widen by 7 percentage points of GDP.
- The expected median fall in real revenues for oil exporters is 5 percentage points of 2019 GDP, while the median of the real change in expenditures is close to zero.
- Saudi Arabia: oil-related revenues fell by almost 7 percentage points of GDP; authorities pared back spending on wage allowances to civil servants, increased customs duties on imports, and tripled the VAT rate to 15 percent.

### Financing considerations and market access
- Financing constraints have likely tempered fiscal responses in emerging market and middle-income economies relative to advanced economies.
- Demand for short-term local currency debt is weak among this group, though investment-grade emerging markets can issue long-term debt in foreign currency.
- Following the US Federal Reserve’s announcement of open-ended asset purchases in late March, Eurobond issuance by emerging markets rose to US$140 billion in the first half of 2020 compared with US$95 billion in 2019.
- Several emerging market central banks introduced or boosted purchases of government debt through quantitative easing (Croatia, Indonesia, Philippines, Poland, Turkey), with amounts far lower as a share of GDP than in advanced economies.
- Other financing actions include tapping extrabudgetary funds or sovereign wealth funds (Chile, India, Russia), raising fuel excise taxes (India), imposing a digital tax on foreign firms (Indonesia), or increasing the VAT rate (Saudi Arabia).

### Low-income developing countries: constrained by financing
- The headline deficit in low-income developing countries is projected to widen by more than 2 percentage points of GDP in 2020 compared with 2019.
- Some countries face much larger primary deficit widenings: Republic of Congo, Ghana, Kyrgyz Republic, Moldova, Mozambique—widen by 6 percentage points or more due to pandemic-related expenditures.
- Other countries project tightened budgets reflecting cuts in primary expenditures: Democratic Republic of the Congo, Sudan, Timor-Leste, Zambia.
- Aggregate expenditures relative to GDP are projected to decrease relative to the January 2020 World Economic Outlook Update forecast, driven by downward revisions in some larger countries (Côte d’Ivoire, Uganda, Vietnam).
- In real terms, almost half of low-income developing countries are projected to cut total spending, and about 60 percent are expected to cut capital spending in 2020 from 2019 levels.
- Revenues of oil exporters in real terms are projected to decline, on average, by 15 percent, compared with a real decline of 9 percent, on average, in non–oil exporters.
- Several countries’ real revenues are projected to increase by more than 5 percent (Burkina Faso, Chad, Haiti, Niger, Senegal) driven by grants.
- Debt service relative to tax revenues will exceed 20 percent in over half of low-income developing countries in 2020 and 2021 (Figure 1.12).
- Commercial credit as a percentage of external low-income developing country debt rose from less than 8 percent to more than 19 percent from 2010 to 2018.
- Projected disbursements from multilateral development banks to countries eligible for IDA 19 (plus Angola) from April to December 2020 amount to US$45 billion—more than six times the total debt service (US$7 billion).
- More than half of low-income developing countries are now in debt distress or at high risk of debt distress.

### Off-budget, quasi-fiscal measures, and state-owned enterprises
- Off-budget and quasi-fiscal measures could add to fiscal vulnerabilities.
- State-owned enterprises have supported the economy by greater lending to companies and households (Brazil) or undertaking quasi-fiscal operations such as temporarily reducing electricity tariffs or waiving port fees (China).
- Examples of nonstandard fiscal actions include use of sovereign wealth funds (Russia’s National Welfare Fund resources offset a decline in government oil revenues as established in the fiscal rule), and equity injections in specific sectors.

### Assessment of fiscal policy design and effectiveness
- The April 2020 Fiscal Monitor recommended large, timely, temporary, and targeted fiscal support for people and viable firms most affected by COVID-19, including those in hard-to-reach informal sectors.
- Many governments deployed large and timely measures; however, timeliness often came at the expense of targeting, and durations were often extended because of continued lockdowns.
- On average, countries that implemented strong containment measures such as mobility restrictions before total cases reached 100 ultimately deployed smaller fiscal packages (Figure 1.13, panel 1).
- Fiscal support was larger for countries with higher income per capita (Figure 1.13, panel 2).
- Countries with initially high sovereign bond spreads deployed smaller on-budget support (Figure 1.13, panel 3); those with initially high public debt deployed larger off-budget support (Figure 1.13, panel 4).
- Fiscal measures helped mitigate the health and economic fallout, more so in advanced economies where average fiscal support has been larger.

### Poverty, inequality, and distributional impacts
- Based on projected declines in per capita incomes (June 2020 World Economic Outlook Update), 100 million to 110 million people globally are expected to enter extreme poverty relative to the pre-COVID projection.
- Additional social assistance supporting directly the poor and helping limit the recession is expected to have a modest impact, containing the increase to 80 million to 90 million (Figure 1.14).
- The pandemic’s impact would be concentrated largely in emerging market and developing economies in sub-Saharan Africa and South Asia.
- Income inequality within countries is expected to increase as the pandemic affects low-income individuals disproportionately (Palomino, Rodriguez, and Sebastian 2020).

*Source: International Monetary Fund | October 2020.*

### 1. Fiscal Support and Stringency of Early Containment2. Fiscal Support and Initial Income per Capita

### 1. Fiscal Support and Stringency of Early Containment2. Fiscal Support and Initial Income per Capita

### Fiscal response patterns and country preconditions
- Countries that swiftly put in place stronger containment measures ultimately deployed smaller fiscal packages.
- Total fiscal support was larger for countries with higher income per capita.
- Countries with initially high sovereign bond spreads deployed less on-budget support.
- Countries with initially high public debt levels deployed more off-budget support.
- Figure indicators (as presented):
  - Early stringency of mobility restrictions (index 0–100).
  - GDP per capita, 2019 (thousands of US dollars, PPP).
  - Public debt, 2019 (percent of GDP).
  - On-budget support (percent of GDP).
  - Off-budget support (percent of GDP).
  - Fiscal package (percent of GDP).

### Health preparedness costs and implications
- Estimates suggest increasing intensive-care capacity by one-fifth (excluding capital costs) and testing capacity to twice per individual in a year would cost between 0.3 and 0.5 percent of GDP in selected advanced economies (G7, Korea, Spain).
- Capital and recurrent costs of strengthening pandemic preparedness are likely higher in emerging market and developing economies with weaker health systems.

### Social assistance and poverty outcomes
- Additional social assistance has helped mitigate the potential increase in global poverty.
- Figure 1.14 indicators (Global Extreme Poverty Rate, percent of total population):
  - 2018: 8.9
  - 2020 estimate before COVID-19: 9.3
  - COVID-19 health crisis effect: –0.8
  - Additional social assistance effect: 1.4
  - 2020 estimate after COVID-19: –0.3
- Cash transfers:
  - Particularly effective in protecting the poor; larger impact on total consumption when targeted to those most likely to spend (for example, the unemployed).
  - United Kingdom: increase in means-tested universal credit allowance estimated to fully offset adverse impact on poverty.
  - United States: higher-income households receiving “stimulus checks” spent less than lower-income households; spending concentrated on goods less affected by lockdowns.
- Unemployment benefits found more effective than “stimulus checks” in reaching households with higher propensity to consume additional resources.
- In emerging market and developing economies with large informal sectors, cash and in-kind transfers provided better coverage of vulnerable households than unemployment benefits.
- Examples of rapid expansion of coverage: India, Togo, Turkey (cash benefits); Nepal, Rwanda (in-kind food assistance).
- Latin America: expansion of safety nets improved coverage of structurally poor but often failed to reach temporarily vulnerable groups such as informal lower-middle-income workers.

### Employment measures and job retention
- Wage subsidies effective in preserving employment linkages but risk delaying labor reallocation if maintained too long after reopenings.
- Take-up of job retention schemes:
  - Averaged one-quarter of employees in OECD economies.
  - Exceeded half of employees in two cases (France, New Zealand).
- Denmark: firms reported fewer job separations because of strong wage subsidy take-up.
- Headline unemployment rates increased less in economies channeling more labor market support through wage subsidies (Australia, United Kingdom) than through unemployment benefits (Canada, United States).
- About one-fifth of persons enrolled in short-time work schemes in the five largest European economies are in hard-hit sectors and face elevated risk of unemployment when support is phased out.
- About one-third of pandemic-induced firm-level layoffs in the United States are estimated to be permanent.
- Overextended job retention schemes and overly generous unemployment benefits could delay necessary job reallocations.

### Liquidity, credit support, and firm solvency measures
- Loans and guarantees aimed to provide liquidity, but many countries report low take-up (for example, Germany, Italy, United Kingdom).
- Low take-up drivers: administrative capacity constraints, program conditionality, liquidity buffers in less-affected sectors, availability of alternative support (grants, wage subsidies), private debt overhang, elevated uncertainty, complex program design.
- United States Paycheck Protection Program: initially low take-up; modest effect on employment in small businesses because less-affected businesses primarily received loans.
- United Kingdom SME support: Bounce Back Loan Scheme had 20 times more SME loans than Coronavirus Business Interruption Loan Scheme due to lower maximum loan size and higher government guarantee.
- Banks in the euro area reported government guarantees helped keep credit standards favorable for SMEs.
- Equity injections used to prevent bankruptcies of hard-hit strategic firms (for example, national airlines); risk of delaying sectoral reallocation.
  - Some governments provided convertible loans with options to convert bonds into common equity (New Zealand, Singapore).
  - France combined airline support with conditionality on cutting emissions.
- Tax measures primarily consisted of deadline extensions and payment deferrals; less effective than debt moratoriums and wage subsidies given reduced sales and profits.
  - Other tax actions: tariff waivers on medical supplies (Colombia, Vietnam), quick customs procedures (Philippines), accelerated VAT refunds (France, Indonesia), new/expanded loss carryback rules (China, New Zealand, Japan), accelerated depreciation deductions (Australia), reduced social security contributions (Argentina, China, France, Korea).
- Payment forbearance policies provided short-term relief: mortgage moratoriums (United States), utilities (Argentina, Colombia, Japan), rents (China), loans (Argentina, Turkey).

### Magnified fiscal risks
- Major fiscal risks identified:
  - A protracted economic downturn: without herd immunity or widespread effective therapies/vaccine, outbreaks and associated fear may persist; could lead to more bankruptcies, bank balance sheet deterioration, greater fiscal support needs, and reallocation of budget resources away from firms that are no longer viable.
  - Tightening of financial conditions: rapid growth in sovereign and private debt stocks raises exposure to changes in financing conditions; abrupt market tightening could spike borrowing costs; local currency depreciation would increase debt costs for entities with foreign-currency debt; low-income developing countries face compounding debt servicing problems due to low revenue mobilization and weak administrative systems.
  - Commodity market volatility: commodity price fluctuations affect exporters and importers differently; a sharp fall in oil prices would further undermine budgets of oil exporters but could relieve importers.
  - Contingent liabilities: guarantees and other contingent liabilities could be called in an adverse scenario, adding substantially to debt vulnerabilities; quantification is challenging and depends on program size, projected guarantees issued, downturn duration, borrower default likelihood, and expected recovery rates.
- Upside risks: rapid development and distribution of a safe, affordable, effective vaccine; productivity-boosting structural changes; faster-than-expected normalization in reopened areas—each would imply faster recovery and reduced necessary fiscal support.

### Fiscal roadmap and phase-specific strategies
- Priority: bring the pandemic under control—develop vaccines and treatments and ensure universal low-cost access; multilateral coordination and financial support for developing economies are vital.
- Fiscal strategies must be flexible and adapt across three pandemic phases:
  1. The outbreak with lockdowns.
  2. Partial reopening.
  3. High degree of control via medical advances.
- Throughout: ensure full transparency, good governance, and costing of all fiscal measures.
- Phase 1 (Widespread Lockdowns) guidance:
  - Fiscal policy devoted to accommodating additional health and emergency services, and providing lifelines to affected people and firms.
  - Measures include wage subsidies, unemployment benefits, deferred tax collection, subsidized loans, loan guarantees to allow firms to “hibernate.”
  - Use all available tools: expand social protection (including for informal workers) and financing for SMEs (for example, through public banks).
  - Complement fiscal measures with central bank/regulatory actions (for example, delaying bankruptcies or evictions).
- Table 1.3 summarises fiscal strategies across phases (high-level applicability of measures); selected guidance:
  - Household income support:
    - Cash or in-kind transfers: Yes in Widespread Lockdowns; transition and better target during Gradual Reopening; reconsider within reforms during Post–COVID-19 Recovery.
    - Unemployment benefits: Expand coverage and extend duration during Widespread Lockdowns; refine benefits to preserve work incentives as unemployment normalizes; key component in enhancing social protection systems.
  - Employment measures:
    - Short-term work/job-retention schemes: Yes in Widespread Lockdowns; reduce use during Gradual Reopening to encourage job moves; reduce access for prolonged cases.
    - Temporary hiring subsidies: Not yet in Widespread Lockdowns; plan/initiate during Gradual Reopening; transition to active labor market policies for recovery.
    - Active labor market policies: Not yet in Widespread Lockdowns; initiate during Gradual Reopening; tailor to structural transformation in recovery.
  - Public investment: plan in Widespread Lockdowns; boost maintenance and public works in Gradual Reopening; scale up quality investment with sustainable financing in recovery.
  - Tax measures:
    - Temporary deferral of taxes and social security payments: Yes in Widespread Lockdowns; targeted deferrals in Gradual Reopening; not in Post–COVID-19 Recovery except as part of debt restructuring.
    - General income tax cuts: No in early phases; consider in recovery depending on fiscal space and targeting.
    - Progressive taxes: Consider especially if financing is limited; in recovery, choice of instruments should conform to good tax law design.
  - Liquidity and solvency support:
    - Loans and guarantees: Yes in Widespread Lockdowns with conditions (preserve jobs, restrictions on dividends/executive pay); refine and tighten generosity in later phases and manage fiscal risks.
    - Solvency support (equity injections): Yes for systemic and strategic firms with restrictions on dividends/executive pay; aim for timely exit.
    - Debt restructuring: No in Widespread Lockdowns; prepare streamlined restructuring frameworks during Gradual Reopening; use in recovery to facilitate reallocation and exit of nonviable firms.

### Key statistics and figures highlighted
- Intensive-care capacity increase by one-fifth and testing to twice per individual/year: cost between 0.3 and 0.5 percent of GDP (selected advanced economies).
- Global extreme poverty indicators:
  - 2018: 8.9 (percent of total population)
  - 2020 estimate before COVID-19: 9.3
  - COVID-19 health crisis effect: –0.8
  - Additional social assistance effect: 1.4
  - 2020 estimate after COVID-19: –0.3
- Take-up of job retention schemes: averaged one-quarter of employees in OECD economies; exceeded half in France and New Zealand.
- One-fifth of persons enrolled in short-time work schemes in the five largest European economies are in hard-hit sectors.
- About one-third of pandemic-induced firm-level layoffs in the United States estimated to be permanent.
- Two-thirds of beneficiaries under the US Federal Pandemic Unemployment Compensation Program received unemployment benefits greater than lost earnings (as cited).
- United Kingdom Bounce Back Loan Scheme delivered 20 times more SME loans than the previously announced Coronavirus Business Interruption Loan Scheme.
- Take-up of guaranteed loans figures and country comparisons were presented visually for Germany, United Kingdom, France, Italy, Spain (data as of end of June 2020).

*Source: IMF Fiscal Monitor chapter content as provided.*

### CHAPTER 1 FISCAL POLICIeS TO ADDReSS The COvID-19 PANDeMIC

### CHAPTER 1 FISCAL POLICIeS TO ADDReSS The COvID-19 PANDeMIC

### Phase 2: Gradual Reopening under Uncertainty
- Public health remains the top priority to ensure a sustainable reopening of the economy; economic activity will remain depressed if easing of social distancing measures is not accompanied by public confidence that the pandemic is being brought under control.
- Resources should be directed to fund smart containment strategies comprising intensive testing and tracing, localized mobility restrictions, and real-time risk assessment.
- Fiscal policy must remain flexible given the risk of new waves of infection; removing government support too fast could prolong the recession and worsen poverty and inequality.
- Replacing phase 1 lifelines with broad-based fiscal stimulus is unlikely to be cost-effective because the recovery is expected to be uneven, with supply disruptions and depressed demand concentrated in certain sectors.
- For countries with fiscal space, a better alternative could be to accelerate job-intensive public investments such as maintenance or public works, as these are less disrupted by social distancing and can crowd in private investment.
- Where fiscal space is limited, prioritize resources toward safeguarding enhanced safety nets and reopening the economy, focusing on:
  - creating a safe work environment,
  - helping workers find new jobs,
  - helping viable but still-vulnerable firms reopen after revenue losses and rising leverage.
- Reprioritization of spending (which could include containing the public sector wage bill) will likely be needed, especially where borrowing constraints are tighter.
- Revenue-enhancing measures governments may consider:
  - increasing tax compliance and the progressivity of taxes on more affluent and less-affected groups;
  - reforms to modernize business taxation, including design of international corporate taxation on a multilateral cooperative basis to respond to the digital economy;
  - designing corporate income taxes to capture very high profits and windfall profits during the crisis to help finance priority areas such as health and social safety nets;
  - tax policy options include increasing tax rates on higher bracket incomes, capital income higher end property, or wealth;
  - lower oil price levels facilitate increases in taxes (or reductions in subsidies) on fuel, which in emerging market and developing economies will impact mostly the well-off.
- As activity resumes and health risks diminish, exceptional support should be phased out or modified to facilitate movement to new and more productive jobs:
  - reduce job retention programs and reintroduce job search requirements;
  - increase programs for online training and learning to help the unemployed, complemented by hiring incentives (citations: Baqaee and Farhi 2020; OECD 2020e);
  - link unemployment benefits to local unemployment rates to steer support to hardest-hit areas;
  - introduce or make permanent enhanced automatic stabilizers and social protection (for example, paid sick leave and extension of unemployment benefits to self-employed or temporary workers) to provide timely support that unwinds automatically as conditions improve.

### Selective Support to Firms to Help Them Reopen
- Government support to firms exiting lockdown with high leverage and mounting losses can limit defaults that would undermine recovery and exacerbate unemployment, but support should be more selective to limit costs and avoid distorting competition.
- Support should be directed to otherwise viable firms impaired by health risks or social distancing, or to firms crucial for the economy to function.
- Fiscal strategy could include risk-sharing with investors and creditors to limit fiscal costs and risks to taxpayers.
- Examples of support measures:
  - Liquidity support such as government loans and guarantees could be extended, especially if banks remain reticent to lend, but generosity should be gradually reduced (for example, use of partial guarantees and more access conditions).
  - Solvency support should prioritize systemic firms where bankruptcies could disrupt supply chains or provision of critical services (for example, hospitals, utilities) and to prevent a wave of SME defaults; existing shareholders should bear much of the burden; government support should include conditions (for example, caps on executive compensation and bans on dividends and share buybacks) and could be in exchange for equity participation.
- SME-targeted measures and examples:
  - Temporary debt repayment moratoria or temporary suspension of insolvency rules (examples: Egypt, Ghana, Kazakhstan).
  - Longer-lasting options: securitizing SMEs’ debt with government guarantees (Portugal), government buying securitized SME debt (Australia), providing equity or hybrid instruments (for example, convertible bonds), government financial support for corporate debt restructurings for SMEs.
  - For hard-to-reach informal-sector SMEs, channel support through institutions serving these groups (for example, micro-credit institutions and informal sector organizations); provide grants or guarantees for bank lending to formal and informal microenterprises and SMEs (examples: Gambia, Malaysia) or give temporary relief on payments such as rent and utilities.
  - In some cases, accompany SME measures with direct support to informal workers.

### Phase 3: The Pandemic under Control
- When vaccines and therapies become widely accessible, policy goals shift to promoting an inclusive and green recovery and structural transformation, while unwinding government interventions and tackling higher corporate and public debt.

### Support the Recovery while Ensuring Debt Sustainability
- The appropriate fiscal stance depends on access to financing, debt levels, and the extent of scarring (long-lasting damage from bankruptcies, disrupted supply chains, and discouraged workers).
- Countries will need to rebuild fiscal buffers over the medium term given large deficits and jumps in debt levels; tightening too fast could undermine recovery and job creation crucial to reduce poverty.
- Policy guidance by country context:
  - For countries with fiscal space and deeper scarring, temporary expansionary measures—implying a slower reduction in the fiscal deficit and a further increase in debt in the short term—can balance pro-growth and debt sustainability objectives over the medium term (Figures 1.18 and 1.19).
  - For countries with limited fiscal space and tighter financing constraints, fiscal deficits would need to be reduced faster to prevent debt distress or increases in borrowing costs that could derail recovery (Figure 1.20).
- Considerations for economies with large shares of government debt denominated in foreign currency: a more cautious fiscal stance is needed because of possible effects of currency depreciation.
- Countries reliant on sectors facing persistent negative impacts (for example, receipts from oil exports or tourism) will face a greater challenge managing weaker economies with tighter fiscal constraints; composition of fiscal adjustment becomes central to avoid undermining recovery.
- For many emerging market and developing economies, the pandemic has been a major setback to achieving the Sustainable Development Goals by 2030; these countries will need to boost revenue capacity and seek sustainable financing, including development aid. International cooperation and debt relief initiatives (for example, the Debt Service Suspension Initiative) including private sector participation are critical for recovery and achieving the SDGs.

- Numeric and modeling references preserved from analysis:
  - Figures referenced: 1.18 through 1.20 (normative model simulations).
  - Figure 1.18: normative fiscal adjustment path for an advanced economy with an average debt level (baseline) at 80 percent of GDP (period shown: 2013–25; variable: structural primary balance in percent of potential GDP).
  - Figure 1.19: GDP growth path for each adjustment path (percent change in GDP; period 2013–25). High debt level referenced at 140 percent of GDP; high interest cost refers to an addition of 1 percent compared with the baseline on average.
  - Figure 1.20: normative change in structural primary balance relative to no-policy-change scenario over 2021–23 in percent of potential GDP; scenarios include baseline (average debt), higher debt, higher debt and higher interest rate.

### Stimulus Measures Should Be Cost-Effective and Targeted to Lower-Income Households
- As supply disruptions diminish, temporary fiscal stimulus can have a powerful multiplier effect on aggregate demand and output, particularly in countries with low interest rates partly because of a savings glut.
- High public debt levels and precautionary savings could reduce multipliers.
- Choice of fiscal instruments determines impact on growth and job creation:
  - Targeted transfers (for example, enhanced social safety nets) and income tax cuts for low-wage workers can boost consumption in the poorest households, resulting in higher short-term multipliers (Figure 1.21; Online Annex 1.5).
  - Temporary provisions for accelerated depreciation or investment tax credits can reduce the cost of capital and encourage frontloading of private investment.
  - Active labor market policies (including worker retraining) support reallocation to more productive formal jobs and higher earnings.
- For countries with limited space to borrow, combining fiscal instruments can achieve objectives while containing public debt:
  - Example: rise in targeted transfers to protect the most vulnerable financed by progressive income taxes; tax increases could be legislated now to become effective a few years later, or implemented immediately if reducing debt is urgent.
  - Another option: finance additional public investment with higher indirect taxes.

- Empirical/modeled references preserved:
  - Figure 1.21: shows that targeted measures have a greater impact (fiscal multipliers) on output—measured as increase in output per US$1 of stimulus—comparing targeted transfers, untargeted transfers, targeted labor tax, untargeted labor tax. Short (long)-term multipliers refer to cumulative multipliers at the end of one (five) years. The multiplier estimates assume an environment of low growth and low interest rates, and one in which poorer households are cash constrained.
  - Figure 1.22: scenario comparisons include (1) no fiscal package; (2) slower adjustment with a fiscal package of higher transfers and gradual increase in taxes on the high-income group as debt rises; and (3) faster adjustment where higher transfers and taxes are raised from year 1 and more aggressively as debt rises. Output impact is relative to a scenario without the pandemic.

### Unwind Government Interventions in the Corporate Sector
- As recovery proceeds, unwinding large public interventions and managing associated fiscal risks becomes a priority.
- An effective debt resolution system—streamlined restructuring framework and institutional capacity to manage a large number of bankruptcies—can promote smooth reallocation of resources to more productive uses.
- Governments, as major creditors for SMEs, can facilitate debt restructuring but must accept losses from unpaid taxes and pandemic-era loans; such restructuring should be authorized by legislation and carefully circumscribed to ensure accountability and transparency.
- Note: government ownership tends to be associated with weaker firm performance and can distort competition (cited).

### The Recovery Can Enable Building a More Inclusive and Green Economy
- The crisis underscores the need for ambitious reform agendas and investment in human and physical capital to make economies more resilient, address poverty and inequality, and tackle climate change.
- Fiscal levers to promote inclusivity and reduce inequality include:
  - Progressive income taxation and education and health spending as important tools for addressing income inequality.
  - Reorient expenditures toward investment in people and raising equitable revenues to ensure the post-pandemic economy is more inclusive and green.

*International Monetary Fund | October 2020*

### 1. Targeted Transfers, Liquidity-Constrained Households

### 1. Targeted Transfers, Liquidity-Constrained Households

### Fiscal measures and their macroeconomic impact
- Figure 1.22 summarizes the "Impact of a Fiscal Package on Output and Government Debt" (Percent).  
- Fiscal responses to the COVID-19 crisis can affect both short-run output and debt-to-GDP ratios; the source presents percent deviation in output relative to no recession and percent changes in debt-to-GDP over years shown in the figure.

### Strengthening social protection and targeting transfers
- The crisis exposed structural gaps in social protection, contributing to rising inequality.
- Policy goal: ensure all have access to basic goods (for example, food and shelter) and services (for example, health and education) during crises.
- Key finding: an additional 1 percentage point of social spending to GDP can reduce extreme poverty headcount by 6 percentage points on average across emerging market and developing economies (Online Annex 1.1).
- Where increases in social spending are not feasible, countries can consolidate inefficient and fragmented programs to enhance capacity to reach larger shares of the population.
- Emerging market and developing economies with less-developed safety nets should strengthen capacity to reach, target, and deliver benefits to the most vulnerable households through:
  - reliable universal identification systems,
  - safe and transparent delivery (for example, digital transfers),
  - up-to-date and integrated socioeconomic data to identify vulnerable households and provide timely and adequate safety nets.
- Advanced economies should improve outcomes of existing programs by extending coverage through enhanced means testing and better preserving work incentives.

### Adequacy and coverage of social protection programs
- Figure 1.23 ("Adequacy and Coverage of Social Protection Programs") reports:
  - Adequacy is measured as total transfers received by beneficiaries as a share of pretransfer total income in the lowest-income quintile.
  - Coverage is the share of lowest-quintile individuals who receive social protection benefits.
- Key observation: Social protection programs in low-income developing countries have low coverage, and in many emerging market developing economies provide insufficient benefits.
- Regional labels used: CCA = Caucasus and Central Asia; EM = emerging market; EMEs = emerging market economies; LAC = Latin America and the Caribbean; LIDCs = low-income developing countries; MENAP = Middle East, North Africa, Afghanistan, and Pakistan; SSA = sub-Saharan Africa.

### Private sector debt vulnerabilities and implications for fiscal policy
- Private sector debt was elevated before the pandemic:
  - Nonfinancial corporate and household debt reached almost 150 percent of GDP in 2019.
  - Private debt exceeded public debt by a large margin in most G20 countries (Figure 1.1.1).
- Corporate debt quality had been deteriorating: corporate speculative-grade debt shares were nearly 50 percent in China and the United States and even higher in Italy and the United Kingdom.
- Capital-raising in H1 2020:
  - $5.4 trillion secured by companies across the globe,
  - including $3.9 trillion since the start of March.
- Risks and transmission channels from high private debt to public sector:
  1. direct public support to corporations or their creditors,
  2. calls on public guarantees on private debts,
  3. countercyclical fiscal response to corporate deleveraging episodes.
- Historical and pandemic-era support measures:
  - Cumulative gross support to financial institutions in 37 countries following the global financial crisis was $3.5 trillion.
  - Governments announced guarantee programs equivalent to $3.8 trillion in response to the pandemic.
- Policy implications:
  - Fiscal action may ultimately be required to help repair private balance sheets.
  - Equitable and rapid bankruptcy procedures can help manage corporate distress.
  - For strategic or systemic firms with unsustainable debt, governments may need to absorb some debt while avoiding bailouts that favor owners.
  - Consider reconsidering public policies that encourage debt accumulation, such as the deductibility of interest for tax purposes.

### Greening the fiscal response and investment priorities
- The pandemic recovery is an opportunity to accelerate the transition to a low-carbon economy.
- Initial assessment: little of the fiscal response to date has been "green."
- Greenness varied across the G20:
  - France allocated almost 1 percent of GDP to green measures.
  - Many countries had no climate-positive measures or had significant climate-negative measures.
- Green measures have mainly been direct budget expenditures (for example, incentives for more energy-efficient vehicles), loans and grants for green investments, and investments in climate-resilient infrastructure.
- Negative measures have largely been bailouts (for example, airlines in Brazil, China, France); only France attached significant green conditionality to its bailout to date.
- Recommendations for greening the recovery:
  - More robust carbon pricing as a core policy: it encourages reduced energy use, shifts to cleaner alternatives, and generates revenues for efficient and equitable fiscal packages.
  - Reduce subsidies or tax incentives for emissions-intensive activities.
  - Invest in clean energy infrastructure to create jobs and crowd in private investment.
  - Undertake and publish climate impact assessments and introduce green budgeting to increase transparency and accountability.
- Examples from past recoveries:
  - Korea’s post-global financial crisis multiannual infrastructure program focused on climate-relevant public infrastructure.
  - United States used support for auto firms to introduce tougher emissions standards in a "green-bargain."

### Size and composition of fiscal responses to the COVID-19 crisis (as of September 11, 2020)
- Countries announced discretionary fiscal measures averaging close to 12 percent of GDP.
- Advanced economies:
  - Direct budget support committed is equivalent to 9.3 percent of GDP.
  - Another 11 percent of GDP committed to liquidity support (equity injections, loans, guarantees, quasi-fiscal activities).
  - Support focused on workers and employers via wage subsidies and short-term work schemes, expanded unemployment and sickness benefits, and cash transfer schemes.
- Emerging market and middle-income economies:
  - Total fiscal support amounts to about 6 percent of GDP, 3.5 percentage points of which is committed on budget.
  - Budget measures have included public works, job retention schemes, and targeted cash and in-kind benefits.
  - Public sector equity injections, loans, and guarantees have been modest on average, exceeding 5 percent of GDP in only a few cases (Brazil, Peru, Turkey).
- Low-income developing countries:
  - Total fiscal support announced is 1.8 percent of GDP, largely through budgetary measures.
  - Spending on health services has amounted to 0.3 percent of GDP.
  - Large share of support allocated to protecting households through cash and in-kind transfers, temporary unemployment benefits, and utility subsidies.

*International Monetary Fund | October 2020*

### 21. https://www.piie.com/blogs/realtime-economic-issues-

### ch1 - 21.

### Fiscal stimulus, consumption, and household liquidity
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- Bayer, C., B. Born, R. Luetticke, and G. J. Müeller. 2020. “The Coronavirus Stimulus Package: How Large Is the Transfer Multiplier?” CEPR Working Paper DP14600, Centre for Economic Policy Research, London.
- Chetty, R., J. Friedman, N. Hendren, and M. Stepner. 2020. “How Did COVID-19 and Stabilization Policies Affect Spending and Employment? A New Real-Time Economic Tracker Based on Private Sector Data.” Opportunity Insights Working Paper, Harvard University, Cambridge, MA.
- Ganong, P., P. J. Noel, and J. S. Vavra. 2020. “US Unemployment Insurance Replacement Rates during the Pandemic.” NBER Working Paper 27216, National Bureau of Economic Research, Cambridge, MA.
- Faria-e-Castro, M. 2020. “Fiscal Policy during a Pandemic.” Federal Reserve Bank, St. Louis Working Paper 2020–006C.

### Labor market policies, job retention, and unemployment insurance
- Bennedsen, M., B. Larsen, I. Schmutte, and D. Scur. 2020. “Preserving Job Matches during the COVID-19 Pandemic: Firm-Level Evidence on the Role of Government Aid.” Working Paper, Initiative on the Digital Economy, Massachusetts Institute of Technology, Cambridge, MA.
- Tetlow, G., T. Pope, and G. Dalton. 2020. “Coronavirus and Unemployment: The Importance of Government Policy: A Five Nation Comparison.” IfG Insight, Institute for Government, London.
- Landais, C., P. Michaillat, and E. Saez. 2018. “A Macroeconomic Approach to Optimal Unemployment Insurance: Theory.” American Economic Journal: Economic Policy 10 (2): 151–81.
- Fang, L., J. Nie, and Z. Xie. 2020. “Unemployment Insurance during a Pandemic.” Federal Reserve Bank of Atlanta Working Paper 2020–13.
- Ganong, P., P. J. Noel, and J. S. Vavra. 2020. “US Unemployment Insurance Replacement Rates during the Pandemic.” NBER Working Paper 27216, National Bureau of Economic Research, Cambridge, MA.

### Social protection, poverty, and reaching households
- Gentilini, U., M. Almenfi, D. Pamela, A. V. Lopez, I. Mujica Canas, R. Codero, and U. Zafar. 2020. “Social Protection and Jobs Responses to COVID-19: A Real-Time Review of Country Measures.” COVID-19 Living Paper, Version 12 (July 10), World Bank, Washington, DC.
- Bronka, P., D. Collado, and M. Richiardi. 2020. “The COVID-19 Crisis Response Helps the Poor: The Distributional and Budgetary Consequences of the UK Lockdown.” EUROMOD Working Paper EM 11/20, Institute for Social and Economic Research, University of Essex, Essex, UK.
- Busso, M., J. Camacho, J. Messina, and G. Montenegro. 2020. “The Challenge of Protecting Informal Households during the COVID-19 Pandemic: Evidence from Latin America.” Discussion Paper IDB-DP-780, Inter-American Development Bank, Washington, DC.
- Prady, D. 2020. “Reaching Households in Emerging and Developing Economies: Citizen ID, Socioeconomic Data, and Digital Delivery.” Special Series on COVID-19, Fiscal Affairs Department, International Monetary Fund, Washington, DC.
- Una, G., R. Allen, S. Pattanayak, and G. Suc. 2020. “Digital Solutions for Direct Cash Transfers in Emergencies.” IMF Special Series on COVID-19, Fiscal Affairs Department, International Monetary Fund, Washington, DC.
- Una, G., H. van Eden, A. Singh, F. Bardella, and A. Verma. 2020. “Enhancing Digital Solutions to Implement Emergency Responses.” Special Series on COVID-19, Fiscal Affairs Department, International Monetary Fund, Washington, DC.

### Corporate sector, SMEs, and financial sector interventions
- Dreyer, M., and K. Naygaard. 2020. “Utilization of Credit Support Programs for SMEs.” Systemic Risk (blog), Yale University School of Management, July 20. https://som.yale.edu/blog/utilization-of-credit-support-programs-for-smes.
- OECD. 2020a. “Coronavirus (COVID-19): SME Policy Responses.” OECD, Publishing Paris.
- OECD. 2020b. “Corporate Sector Vulnerabilities during the COVID-19 Outbreak: Assessment and Policy Responses.” OECD Publishing, Paris.
- OECD. 2020c. “Equity Injections and Unforeseen State Ownership of Enterprises during the COVID-19 Crisis.” OECD Publishing, Paris.
- Cororaton, A., and S. Rosen. 2020. “Public Firm Borrowers of the US Paycheck Protection Program.” Cox School of Business Research Paper 20-01, Southern Methodist University, Dallas, TX.
- Igan, D., H. Moussawi, A. Tieman, A. Zdzienicka, G. Dell’Ariccia, and P. Mauro. 2019. “The Long Shadow of the Global Financial Crisis: Public Interventions in the Financial Sector.” IMF Working Paper 19/164, International Monetary Fund, Washington, DC.
- Bergthaler, W., K. Kang, L. Yan, and M. Dermot. 2015. “Tackling Small and Medium-Sized Enterprise Problem Loans in Europe.” IMF Staff Discussion Note 15/04, International Monetary Fund, Washington, DC.
- Liu, Y., J. Garrido, and C. DeLong. 2020. “Private Debt Resolution Measures in the Wake of the Pandemic.” Special Series on COVID-19, Fiscal Affairs Department, International Monetary Fund, Washington, DC.
- Mbaye, S., M. Moreno Badia, and K. Chae. 2018. “Bailing Out the People? When Private Debt Becomes Public.” IMF Working Paper 18/141, International Monetary Fund, Washington, DC.

### Tax policy, public finance, and fiscal tools
- De Mooij, R. 2012. “Tax Biases to Debt Finance: Assessing the Problem, Finding Solutions.” Fiscal Studies 33 (4): 489–512.
- Fotiou, A., W. Shen, and S.-C. Yang. 2020. “The Fiscal State-Dependent Effects of Capital Income Tax Cuts.” IMF Working Paper 20/71, International Monetary Fund, Washington, DC.
- Djankov, S., and J. Nasr. 2020. “Tax Relief in a Time of Crisis: What Countries Are Doing to Sustain Business and Household Liquidity.” Let’s Talk Development (blog), World Bank, April 1. https://blogs.worldbank.org/developmenttalk/tax-relief-time-crisis-what-countries-are-doing-sustain-business-and-household.
- OECD. 2020f. “Tax Administration Responses to COVID-19: Measures Taken to Support Taxpayers.” OECD Publishing, Paris.
- Garcia-Escribano, M., and C. Abdallah. 2020. “Issues When Cutting Government Pay to Help Reshuffle Spending in a Crisis.” Special Series on COVID-19, Fiscal Affairs Department, International Monetary Fund, Washington, DC.
- Fournier, J. M. 2019. “A Buffer-Stock Model for the Government: Balancing Stability and Sustainability.” IMF Working Paper 19/159, International Monetary Fund, Washington, DC.

### Macroeconomic analysis, multipliers, and longer-term considerations
- Baqaee, D., and E. Farhi. 2020. “Supply and Demand in Disaggregated Keynesian Economies with an Application to the Covid-19 Crisis.” NBER Working Paper 27152, National Bureau of Economic Research, Cambridge, MA.
- Blanchard, O., T. Philippon, and J. Pisani-Ferry. 2020. “A New Policy Toolkit Is Needed as Countries Exit COVID-19 Lockdowns.” Policy Brief 20/8, Peterson Institute for International Economics, Washington, DC.
- Blanchard, O., and L. Summers. 1986. “Hysteresis and the European Unemployment Problem.” NBER Macroeconomics Annual, Volume 1. Cambridge, MA: National Bureau of Economic Research.
- Ilzetzki, E., E. Mendoza, and C. Vegh. 2013. “How Big (Small?) Are Fiscal Multipliers?” Journal of Monetary Economics 60 (2): 239–54.
- Cerra, V., and S. Saxena. 2008, “Growth Dynamics: The Myth of Economic Recovery.” American Economic Review 98 (1): 439–57.
- Gourinchas, P., and M. Obstfeld. 2012. “Stories of the Twentieth Century for the Twenty-First.” American Economic Journal: Macroeconomics 4 (1): 226–65.
- Jordà, Ò., M. Schularick, and A.M. Taylor. 2016. “Sovereigns versus Banks: Credit, Crises, and Consequences.” Journal of the European Economic Association 14 (1): 45–79.
- Reinhart, C. M., and K. S. Rogoff. 2011. “From Financial Crash to Debt Crisis.” American Economic Review 101 (5): 1676–706.
- Koo, R. 2008. The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession. Singapore: Wiley.

*International Monetary Fund | October 2020*

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_Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2020/october/english/ch1.pdf_