## FISCAL MONITOR: POLICIES FOR THE RECOVERY — October 2020 (Selected Excerpts) ## Source details **Canonical URL:** [FISCAL MONITOR: POLICIES FOR THE RECOVERY — October 2020 (Selected Excerpts)](https://www.imf.org/-/media/files/publications/fiscal-monitor/2020/october/english/text.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fiscal-monitor/2020/october/english/text.pdf.md) - [Structured JSON version](/-/media/files/publications/fiscal-monitor/2020/october/english/text.pdf.json) --- ### Preface — Context, scale, and immediate fiscal dynamics - COVID-19 was declared on March 11, 2020, and "has now claimed more than 1 million lives." - Global fiscal action: - Governments implemented an overall fiscal action of about $12 trillion globally (Foreword). - Estimated at $11.7 trillion, or close to 12 percent of global GDP, as of September 11, 2020 (Chapter 1). - Composition of fiscal actions: - About half additional spending or forgone revenue (including temporary tax cuts). - About half liquidity support (including loans, guarantees, and capital injections). - Pre-pandemic and 2020 debt context: - Total public and private debt reached 225 percent of GDP in 2019, "30 percentage points above the level prevailing before the global financial crisis." - Global public debt stood at 83 percent of GDP in 2019. - Global general government debt is estimated to jump to almost 100 percent of GDP in 2020. - Projected sharp contraction in economic activity of 4.7 percent (World Economic Outlook) is a main driver of the debt increase. - Public debt is expected to stabilize to about 100 percent of GDP until 2025, benefiting from negative interest-growth differentials. - Government deficits are set to surge by an average of 9 percent of GDP in 2020. ### Effectiveness, trade-offs, and fiscal risks - Achievements: - Fiscal actions "saved lives, supported vulnerable people and firms, and mitigated the fallout on economic activity." - Trade-offs and medium-term risks: - Quick public health containment allowed earlier reopening, restoring confidence and reducing social and fiscal costs. - Emergency measures with longer-term implications: - Wage subsidies preserved employment relationships but may slow labor market reallocation. - Temporary tax deferrals and cuts risk becoming permanent. - Equity injections prevented bankruptcies but could delay sectoral reallocation. - Direct or guaranteed loans had low take-up due to administrative constraints and private debt overhang. - Major sources of fiscal risk: - Uncertainty about pandemic course, shape of recovery, scarring, commodity prices, global financial conditions, and contingent liabilities from guarantees. - Financing constraints: - More than half of low-income developing countries are in debt distress or at high risk of debt distress as of September 2020. - IMF lending capacity "now stand at $1 trillion, of which about one-fourth is already committed." ### Executive summary — Roadmap and country differentiation - Highest priority: global efforts to develop and ensure universal access to an affordable and effective vaccine or treatment. - Phased fiscal approach: - Phase 1 (acute outbreak, pervasive lockdowns): "do whatever it takes" to save lives and livelihoods. - Phase 2 (lockdowns ease): ensure lifelines are not withdrawn too rapidly; preserve social protection improvements. - Phase 3 (health risks diminish): shift from protecting employee–firm relationships to helping workers find new jobs and supporting structural transformation. - Country differentiation: - Advanced and some emerging market economies: scope for fiscal policy to remain expansionary; interest rates expected to remain low for a long time. - Other emerging market economies and low-income developing countries: tighter financing constraints require reprioritization, efficiency gains, and further official financial support and debt relief. - Post-pandemic priorities: - Tackle poverty and inequality, build resilience to future epidemics and shocks, ensure access to food, health, education, reduce emissions via higher carbon prices and catalyze low-carbon investment. ### Poverty, social protection, and international support - Poverty projections: - Based on projected fall in per capita incomes, 100–110 million people globally would be expected to enter extreme poverty. - Additional social assistance could contain the increase to 80 million to 90 million people. - The October 2020 WEO revision suggests global poverty estimates are likely at the lower end of that range. - Operational priorities: - Strengthen capacity to reach, target, and deliver benefits; build reliable universal identification systems; ensure safe digital delivery mechanisms. - In advanced economies, improve outcomes of existing programs by extending coverage through enhanced means testing and preserving work incentives. - International community actions recommended: - Debt relief, access to grants and concessional financing; make international resources available for temporary financing challenges; for unsustainable debt consider orderly debt restructuring. ### Chapter 1 — Fiscal response, debt projections, and policy implications - Scale and composition (as of September 11, 2020): - Estimated at $11.7 trillion globally, or close to 12 percent of global GDP. - Roughly half additional spending/forgone revenue; half liquidity support (loans, guarantees, equity injections). - Drivers of debt rise: - Discretionary fiscal measures financed largely by new debt. - Nondiscretionary items (automatic revenue declines and expenditure surges) projected to account for one-third of G20 general government deficits of 2020. - Debt projections (Table 1.2 excerpts, gross debt percent of GDP): - World gross debt (2012–2025): 79.6, 78.3, 78.6, 79.7, 82.7, 81.4, 81.7, 83.0, 98.7, 99.8, 100.3, 100.5, 100.4, 100.1. - Advanced Economies gross debt (2012–2025): 106.8, 105.3, 104.8, 104.2, 106.8, 104.5, 104.0, 105.3, 125.5, 125.6, 125.6, 125.8, 125.7, 125.5. - United States gross debt (2012–2025): 103.3, 104.9, 104.5, 104.6, 106.6, 105.7, 106.9, 108.7, 131.2, 133.6, 134.5, 135.2, 136.0, 136.9. - Japan gross debt (2012–2025): 228.7, 232.2, 235.8, 231.3, 236.4, 234.5, 236.6, 238.0, 266.2, 264.0, 263.0, 262.8, 263.0, 264.0. - Net debt (selected series, percent of GDP 2012–2025): - World net debt: 65.9, 65.1, 65.4, 66.8, 69.5, 68.2, 68.7, 69.5, 87.4, 88.1, 88.9, 89.0, 89.0, 89.3. - Advanced Economies net debt: 76.9, 76.0, 75.9, 75.9, 77.6, 76.0, 76.1, 76.7, 96.1, 96.4, 97.3, 97.5, 97.7, 98.3. - Japan net debt: 145.3, 144.7, 146.6, 146.4, 152.0, 149.8, 153.5, 154.9, 177.1, 178.9, 178.6, 178.5, 178.7, 179.7. - Fiscal outcomes and heterogeneity: - Advanced economies: headline fiscal deficits in 2020 expected to be over four times higher than in 2019; median real spending increase 4.5 percentage points of 2019 GDP; median real revenue decrease 3.5 percentage points of 2019 GDP. - Aggregate average general government debt projected to 126 percent of GDP in advanced economies in 2020. - Canada and the United States: anticipated budget deficits of almost one-fifth of their GDP in 2020. - Debt increases compared with 2019 projected close to 30 percentage points of GDP in Italy, Japan, and Spain; more than 20 percentage points in the United States. - Emerging market and middle-income economies: overall fiscal deficit projected to widen by about 6 percentage points of GDP in 2020 versus 2019; group average general government debt expected to increase to more than 62 percent in 2020 from 53 percent in 2019. - Low-income developing countries: headline deficit projected to widen by more than 2 percentage points of GDP in 2020 versus 2019; debt service relative to tax revenues will exceed 20 percent in over half of low-income developing countries in 2020 and 2021. ### Policy guidance — phase-based fiscal roadmap and instrument design - Overarching guidance: - Fiscal measures should be large, timely, temporary, and targeted to people and viable firms most affected, including informal sectors. - Ensure full transparency, good governance, and costing of all fiscal measures. - Phase-specific guidance (summarized): - Phase 1 (lockdowns): focus on health, lifelines for people and firms — wage subsidies, expanded social protection, deferred taxes, subsidized loans, loan guarantees; use public banks and central bank/regulator actions to delay bankruptcies or evictions. - Phase 2 (partial reopening): maintain support for vulnerable households; shift toward job-search, retraining, and targeted public investment (maintenance, job-rich projects); tighten and refine loan/guarantee generosity; prioritize viable firms and include conditionality for solvency support. - Phase 3 (pandemic under control): unwind exceptional firm interventions; implement debt-resolution frameworks; promote inclusive and green recovery; rebuild fiscal buffers as appropriate. - Tax and revenue policy suggestions in reopening: - Increase tax compliance and progressivity; capture very high profits and windfall profits; consider increasing taxes on higher bracket incomes, capital income, higher-end property, or wealth; lower oil prices facilitate increases in fuel taxes or reductions in subsidies. - Debt-sustainability guidance: - For countries with fiscal space and major scarring: provide temporary stimulus including public investment. - For countries with limited fiscal space: protect public investment and transfers to lower-income households, increase progressive taxation, and ensure highly profitable firms are appropriately taxed. ### Social protection and distributional effects — evidence on program types - Cash transfers: - Particularly effective in protecting the poor; targeted transfers have larger impacts on consumption. - United Kingdom: increase in means-tested universal credit estimated to fully offset adverse impact on poverty. - United States: higher-income households spent "stimulus checks" less than lower-income recipients; unemployment benefits found more effective in reaching households with higher propensity to consume. - Wage subsidies and job-retention: - Effective in preserving employment linkages; take-up averaged one-quarter of employees in OECD economies, exceeding half in two cases (France, New Zealand). - Replacement rates in job-retention schemes tended to be higher than in unemployment benefit programs. - Risk: prolonged schemes may delay labor reallocation. - Coverage gaps: - Social protection programs in low-income developing countries have low coverage and insufficient benefits in many emerging market developing economies. - 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). ### Chapter 2 — Public investment: rationale, sequencing, and impacts - Rationale and timing: - Case for public investment strongest in advanced economies and many emerging markets given low nominal interest rates and weak private investment. - Four immediate steps to accelerate effective investment: invest in maintenance; review and restart promising delayed projects; speed up projects in pipeline to deliver within two years; start planning now for new projects aligned with postcrisis priorities. - Investment needs and gaps: - Digital access (2007–2018): low-income countries 3 percent to 32 percent; emerging market economies 16 percent to 72 percent; advanced economies 64 percent to 86 percent. - Additional investment needed through 2030 (roads, electricity, water, sanitation): emerging markets 2.7 percent of GDP; low-income developing countries 9.8 percent of GDP per year. - Energy investments consistent with 2°C target: would have to rise from 2.0 to 2.3 percent of GDP by 2030. - Public investment composition averages (2000–18): Economic affairs 1.2 percent of GDP; Education 0.4 percent of GDP; Health 0.3 percent of GDP; Others 1 percent of GDP; Environmental protection 0.17 percent of GDP. - Implementation and governance risks: - Empirical evidence (World Bank–financed projects): - Almost 40 percent of projects cost more than appraisal cost. - 75 percent of projects are delayed beyond projected completion at outset. - Projects undertaken when public investment is high can cost 10–15 percent more; scaling up by 3 percent of GDP in low-income countries raises costs by 6 percent above appraisal and delays projects by 2.5 percent. - Mitigants: publish selection criteria; use e-procurement and monitoring platforms; implement "red flag" alert systems; strengthen public investment management institutions. - Job creation and multiplier estimates: - Empirical sectoral job intensities: - US ARRA 2009: about six to eight jobs short term per $1 million spent. - Advanced economies: about two jobs per $1 million in schools/hospitals; three jobs per $1 million in electricity. - Emerging markets: about five jobs per $1 million in roads; eight jobs per $1 million in water and sanitation. - Government R&D in OECD: five jobs per $1 million. - Macro estimates (72 advanced economies and emerging markets): - An unanticipated positive shock to public investment of 1 percent of GDP increases output by between 0.25 and 0.5 percent in the first year. - In periods of higher uncertainty the two-year multiplier could be above 2.0, versus 0.6 baseline. - Employment response under high uncertainty: employment increases by between 0.9 and 1.5 percent over two years to a 1 percent of GDP public investment shock (point estimate 1.2; 10–90 percent confidence interval 0.9–1.5). - Applying employment estimates to about 2.2 billion workers in advanced and emerging market economies implies increasing public investment by 1 percent of GDP would create between 20 and 33 million jobs (macro-based estimate); direct sectoral job-content estimate yields about 7 million jobs. - Crowding-in and sectoral priorities: - Crowding-in strongest in communications and transport (health crisis resolution) and construction and manufacturing (recovery). - Priority public investment areas: health systems, digital infrastructure, climate/environmental protection, social housing. - Climate adaptation and finance: - Rates of return on adaptation investments often exceed 100 percent. - IMF staff estimate low-income countries need about $25 billion annually (1.1 percent of GDP) in public investment for adaptation. - Current official aid for adaptation was $10 billion in 2018 and would have to more than double to meet needs. ### Risks, sequencing, and complementary policies - Key risks: - Corruption and procurement vulnerabilities during fast scaling-up. - Absorptive-capacity constraints and supply bottlenecks inflating costs and delaying implementation. - Complementary measures to enhance effectiveness: - Provide liquidity to firms and effective debt-resolution systems. - Target support to vulnerable but viable firms; prioritize maintenance and ready-to-implement projects. - Strengthen project appraisal, procurement transparency, and public investment management. - International support for EMDEs and low-income countries to scale investment and meet SDGs. *FISCAL MONITOR: POLICIES FOR THE RECOVERY — International Monetary Fund | October 2020* ### Preface ### Preface ### Context and key fiscal developments - The COVID-19 pandemic was declared on March 11, 2020, and "has now claimed more than 1 million lives." - Governments implemented an overall fiscal action of about $12 trillion globally (Foreword) and $11.7 trillion, or close to 12 percent of global GDP, as of September 11, 2020 (Chapter 1). - Composition of fiscal actions: about half consisted of additional spending or forgone revenue (including temporary tax cuts), and about half consisted of liquidity support (including loans, guarantees, and capital injections). - Pre-pandemic debt context: - Total public and private debt reached 225 percent of GDP in 2019, "30 percentage points above the level prevailing before the global financial crisis." - Global public debt stood at 83 percent of GDP in 2019. - 2020 projections and dynamics: - Global general government debt is estimated to make an unprecedented jump up to almost 100 percent of GDP in 2020. - The sharp contraction in economic activity of 4.7 percent projected in the latest World Economic Outlook is a main driver of the debt increase. - Public debt is expected to stabilize to about 100 percent of GDP until 2025, benefiting from negative interest-growth differentials. - Government deficits are set to surge by an average of 9 percent of GDP in 2020. ### Effectiveness and trade-offs of fiscal responses - Objectives achieved: - Fiscal actions "saved lives, supported vulnerable people and firms, and mitigated the fallout on economic activity." - Trade-offs and potential drawbacks: - Public health policies that quickly contained the disease allowed earlier reopening, restoring confidence and reducing social and fiscal costs. - Some emergency measures have longer-term implications: - Wage subsidies preserved employment relationships but may slow labor market reallocation. - Temporary tax deferrals and cuts risk becoming permanent, reducing government revenues. - Equity injections prevented bankruptcies but could delay sectoral reallocation. - Direct or guaranteed loans have had low take-up, reflecting restored confidence but also administrative constraints and private debt overhang. - Financing constraints: - Many emerging markets and low-income developing countries faced binding financing constraints; more than half are at a high risk of debt distress or in debt distress. - Official support has been overwhelmed by financing needs for fiscally constrained economies. ### Fiscal risks, transparency, and recommended frameworks - Major sources of fiscal risk: - Uncertainty about the course of the pandemic, shape of the recovery, extent of scarring, commodity prices, global financial conditions, and contingent liabilities from guarantees. - Policy recommendations: - Avoid premature withdrawal of fiscal support; support should persist, "at least into 2021," to sustain recovery and limit long-term scarring. - Prioritize health and education spending everywhere. - Fiscally constrained economies should prioritize protection of the most vulnerable and eliminate wasteful spending. - Adopt medium- to long-term fiscal frameworks to manage intertemporal trade-offs between short-term support and medium-term risks. - Ensure full transparency, good governance, and costing of all fiscal measures given their size, exceptional nature, and speed of deployment. ### Poverty, social protection, and international support - Poverty impacts: - Based on projected fall in per capita incomes, 100–110 million people globally would be expected to enter extreme poverty. - Additional social assistance is expected to have a modest impact and could contain the increase in poverty to 80 million to 90 million people. - Risks noted: rising malnutrition and problematic access to health and education for important population segments. - International community actions recommended: - Act with debt relief, access to grants and concessional financing now and going forward to help the poorest countries. - Make international resources available to countries facing temporary financing challenges to maintain global financial stability. - For countries with unsustainable debt, consider options for orderly debt restructuring. - IMF lending capacity is noted to "now stand at $1 trillion, of which about one-fourth is already committed." ### Case for public investment (from the Foreword) - Macroeconomic context supporting public investment: - Very low interest rates, high precautionary savings, weak private investment, and erosion of public capital stock. - Investment multipliers are particularly high when macroeconomic uncertainty is elevated. - Estimated impacts: - A 1 percent of GDP increase in public investment, in advanced economies and emerging markets, can: - Push GDP up by 2.7 percent. - Push private investment up by 10 percent. - Create between 20 and 33 million jobs, directly and indirectly. - Strategic priorities for investment: - Investment in health and education, digital and green infrastructure to connect people, improve productivity, and strengthen resilience to climate change and future pandemics. - Overarching message: fiscal policy can be a bridge to "smart, resilient, sustainable, and inclusive growth." *FISCAL MONITOR: POLICIES FOR THE RECOVERY, International Monetary Fund | October 2020 — Preface* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### A Roadmap for Fiscal Policies during the Different Phases of the Pandemic - Highest priority: global efforts to develop and ensure universal access to an affordable and effective vaccine or treatment to contain human, economic, and fiscal costs. - National actions: smart, well-informed, and localized containment policies; social protection improvements to reach, target, and deliver benefits to vulnerable people should be preserved. - Interest rates: high precautionary savings and limited private investment imply interest rates will remain low for a long time in advanced and some emerging market economies, providing scope and motivation for fiscal policy to remain a crucial tool for recovery. - Country differentiation: - Advanced and some emerging market economies: scope for fiscal policy to remain expansionary. - Other emerging market economies and low-income developing countries: tighter financing constraints require reprioritization of expenditures, enhanced efficiency, and further official financial support and debt relief. - Phased fiscal approach: - Phase 1 (acute outbreak, pervasive lockdowns): fiscal policies should be geared to do whatever it takes to save lives and livelihoods. - Phase 2 (lockdowns ease and become more selective): ensure lifelines are not withdrawn too rapidly; preserve improvements in social protection systems. - Phase 3 (health risks diminish, durable recovery foreseeable): shift support from protecting employee-firm relationships to helping workers find new jobs, helping viable but vulnerable firms reopen, and supporting structural transformation toward the post-pandemic economy. - When pandemic is under control (effective vaccines or treatments): foster recovery while addressing legacies—elevated private and public debt levels, high unemployment, rising inequality and poverty. - Fiscal stance depends on country specifics: depth of recession, unemployment, and access to financing. - Countries with fiscal space and major scarring: provide temporary stimulus, including through public investment. - Countries with limited fiscal space: protect public investment and transfers to lower-income households, increase progressive taxation, and ensure highly profitable firms are appropriately taxed, aiming at a growth-friendly and equitable adjustment. - Post-pandemic priorities: tackle poverty and inequality, build resilience against future epidemics and shocks, ensure access to basic goods and services (food, health, education), reduce emissions via higher carbon prices and catalyzing low-carbon investment. ### Chapter 2: Public Investment for the Recovery - Immediate government focus to date: address health emergency and provide lifelines for vulnerable households and businesses. - New needs: prepare economies for safe reopening, create jobs, boost activity, and facilitate transformation to resilient, inclusive, and greener economies. - Priority public investment areas: well-resourced and better-prepared healthcare systems; expanding digital infrastructure; addressing climate change and environmental protection; social housing. - Digital infrastructure: essential to support social distancing and narrow the digital gap that exacerbates disparities in access to information, education, and work opportunities. - Pre-COVID trend: public-investment-to-GDP ratios were already declining and growth in infrastructure had not kept up with needs. - Feasibility and sequencing of public investment even with social distancing—four steps for rapid delivery: 1. Invest right now in maintenance. 2. Review and restart promising projects delayed in preparation or implementation. 3. Speed up projects in the pipeline to bring them to fruition within the next two years. 4. Start planning immediately for new projects aligned with postcrisis priorities. - Public investment management and governance: essential to limit delays, cost overruns, and disappointing projects; an individual project’s cost can increase by 10 percent when public investment in the country is high. - Borrowing to finance quality public investment: - For countries with easy access to finance: effective strategy given global decline in interest rates lowers the bar for investment projects to be beneficial. - For countries with financing constraints: higher bar because of competing spending priorities. - Empirical estimates (cross-country dataset and sample of 400,000 firms): - Fiscal multiplier for public investment in advanced and emerging market economies peaks at over 2 in two years. - Increasing public investment by 1 percent of GDP in these economies would create 7 million jobs directly, and between 20 million and 33 million jobs overall when considering indirect macroeconomic effects. - Crowding in private investment: particularly strong in communications and transport (critical for resolving the health crisis) and in construction and manufacturing (critical for recovery), but requires complementary policies to address private firms’ high leverage and liquidity constraints. - Climate adaptation and official aid: - Rates of return on investments in adaptation to climate change often exceed 100 percent. - Official aid for adaptation is an effective use of public money. - Current official aid for adaptation: $10 billion. - Needed official aid for adaptation in low-income countries: around $25 billion (would have to more than double current allocation). ### Introduction — Fiscal Response, Composition, and Immediate Effects - Scale of fiscal measures (as of September 11, 2020): estimated at $11.7 trillion globally, or close to 12 percent of global GDP. - Composition of measures: roughly half additional spending or forgone revenue (including temporary tax cuts); half liquidity support (loans, guarantees, and equity injections). - Variation by country: size and composition of fiscal support vary vastly, reflecting countries’ available fiscal space. - Why advanced economies and large emerging markets account for bulk of response: 1. Hit earlier and harder by the health crisis. 2. Central banks provided massive monetary stimulus and purchased government or corporate securities while retaining credibility to deliver low inflation. 3. Treasuries could finance larger deficits at low interest rates. - Low-income developing countries: fiscal responses largely on budget and smaller due to tighter financing constraints and being hit later by the health crisis. - Public debt projection: the fiscal response plus sharp output decline and revenue falls will push public debt to levels close to 100 percent of GDP in 2020 globally, the highest ever. - Central bank support: in several advanced economies and emerging market and middle-income economies, central banks directly or indirectly financed large portions of debt buildup. - Low-income developing countries: financing constraints modestly alleviated by debt relief and concessional financing from the official sector. - Preexisting global debt vulnerabilities: total private and public debt in the Group of Twenty (G20) trended upward and reached almost 240 percent of GDP at the end of 2019, with private debt increasing to almost 150 percent of GDP at the end of 2019. - Lower borrowing costs and expectation of persistently low rates enabled governments in advanced economies and many emerging markets to carry higher debt loads by moderating debt-service burdens relative to GDP; governments have also extended the maturity of government bonds. - Private-to-public risk migration: bankruptcies on the rise could shift private debt to the public sector through bailouts. - Debt distress in low-income countries: 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. - Assessment of fiscal measures: - The measures have generally mitigated negative health and economic effects. - Public health policies that contained spread were particularly effective because they supported recovery by restoring confidence and permitting safe reopening. - Cash transfers were vital for the poor (spent largely on necessities). - Unemployment benefits supported consumption for those losing main income. - Potential long-term implications of short-term measures: wage subsidies may slow labor market reallocation; temporary tax deferrals and cuts risk becoming permanent; equity injections, while preventing bankruptcies, could delay sectoral reallocation; low take-up of direct or guaranteed loans partly reflects administrative constraints, conditionality, and private debt overhang. - Record-high public debt limits room for further fiscal support, particularly where borrowing costs or access to financing constrain further action. - Need for doing more to prevent rises in poverty and inequality and to promote strong recovery amid heightened uncertainty; fiscal policy must deliver more with less, with careful design and implementation, and innovation and flexibility. ### Fiscal Developments and the Outlook: Doing Whatever It Takes - Sizable discretionary support plus sharp output contraction and revenue decline have led to surges in government debt and deficits; fiscal support has been much larger than during the global financial crisis. - Drivers of debt rise: - Discretionary fiscal measures financed in large part by new debt during containment phase. - Nondiscretionary items (automatic declines in tax revenues and surges in expenditures such as unemployment benefits) projected to account for one-third of general government deficits of the G20 in 2020. - In advanced economies, 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 a large and positive gap between r and g, r − g > 0). - Under current projections, public debt ratio expected to stabilize in 2021 (except in China and the United States), driven by a strong rebound in economic activity in the baseline and stable, 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 given ongoing uncertainty over the pandemic course and economic fallout. *FISCAL MONITOR: POLICIES FOR THE RECOVERY — International Monetary Fund | October 2020* ### 1. Advanced Economies2. Emerging Market and Middle-Income ### 1. Advanced Economies2. Emerging Market and Middle-Income Economies ### Advanced Economies: Fiscal Policy on the Front Line - Headline fiscal deficits in advanced economies in 2020 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. - Spending increases and revenue decreases almost equally drive the deficit expansions: - 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. - The fall in revenues mainly reflects the economic collapse; average revenues relative to GDP are projected to remain at prepandemic levels in 2020. - Discretionary measures in response to the pandemic (including support to people and firms beyond preexisting automatic stabilizers) account for most of the spending increase. - Off-budget assistance has been unprecedented in the form of liquidity support and guarantees to firms that do not have a direct effect on current budget deficits. - Central bank measures and quasi-fiscal activities in advanced economies include: - Purchases of corporate bonds (Bank of England, Bank of Israel, Bank of Japan, European Central Bank, US Federal Reserve). - Purchases of commercial paper (Bank of Canada, Bank of England, Bank of Japan). - Participation in bank loans to corporations (US Federal Reserve), purchase of corporate bonds in the primary market (Bank of Canada, US Federal Reserve) or secondary market (Bank of Japan). - Additional fiscal packages announced over the summer blended continued support for those most affected with broader fiscal stimulus to encourage recovery and reallocation (examples: support for innovation, training, green growth, expanded digital infrastructure). - Aggregate outcome for debt: - The steady stream of fiscal measures and the economic contraction will push the average general government debt to 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. - Debt is projected to increase more than 20 percentage points of GDP in the United States, driven by on-budget fiscal measures. - Additional noted commitments and funds: - As of mid-July 2020, the Group of Seven (G7) countries had committed $20 billion in vaccine and therapeutics research for COVID-19 (including specified national allocations described in the source). ### 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. - By subgroup: - Oil exporters: average fiscal deficit expected to weaken by about 7 percentage points of GDP. - Non–oil exporters: average deficit expected to weaken by 6 percentage points of GDP. - Composition of the deficit increase: - Projected median revenue decrease is about 3½ percentage points of 2019 GDP. - Projected median 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 remain below pre-pandemic levels. - Country heterogeneity and examples: - Brazil: deficit increase almost 11 percentage points of GDP; COVID-19 discretionary measures contribute more than 8 percentage points of GDP. - South Africa: deficit increase almost 8 percentage points of GDP; COVID-19 discretionary measures contribute more than 5 percentage points of GDP (net COVID-19–related discretionary fiscal measures in South Africa are about 3.2 percent of GDP after expenditure reprioritization). - China: deficit projected to expand by 5.6 percentage points of GDP. - Egypt: deficit relative to GDP projected to remain broadly flat due to annual gross financing requirements exceeding 35 percent of GDP constraining fiscal response. - Pakistan: deficit estimated to have tightened for fiscal year ended June 2020 because COVID-19 impacted only the fourth quarter and capacity to scale up spending was limited. - Oil exporters: - Median fall in real revenues of 5 percentage points of 2019 GDP due to oil price declines. - Median real change in expenditures is close to zero. - Saudi Arabia: fall in oil-related revenues of almost 7 percentage points of GDP; authorities pared back wage allowances, increased customs duties, and tripled the VAT rate to 15 percent. - Financing and market developments: - Financing sources included borrowing internationally, drawing down buffers, purchasing of government debt by central banks, increasing taxes, tapping extrabudgetary or sovereign wealth funds, and other measures. - Following the US Federal Reserve’s announcement of open-ended asset purchases in late March, Eurobond issuance by emerging markets soared 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 government debt purchases through quantitative easing (Croatia, Indonesia, Philippines, Poland, Turkey), though amounts are far lower as a share of GDP than in advanced economies. - Examples of tax and revenue measures: raised fuel excise taxes (India), imposed a digital tax on foreign firms (Indonesia), increased the VAT rate (Saudi Arabia). - Debt vulnerabilities: - Average general government debt in the group is expected to increase to more than 62 percent in 2020 from 53 percent in 2019. - Among large non–oil exporters, Brazil, India, and South Africa have the largest projected increases in debt ratios: 12, 17, and 17 percentage points, respectively. - Among oil exporters, debt ratios in Ecuador and Oman are expected to increase by 17 and 18 percentage points, respectively. - Off-budget and quasi-fiscal measures (state-owned enterprise lending, tariff reductions, fee waivers) could add to fiscal vulnerabilities. ### Low-Income Developing Countries: Constrained by Financing - Headline deficit in low-income developing countries is projected to widen by more than 2 percentage points of GDP in 2020 compared with 2019, with substantial heterogeneity across countries. - Extreme cases and budget responses: - Primary deficit relative to GDP projected to widen by 6 percentage points or more in some countries (Republic of Congo, Ghana, Kyrgyz Republic, Moldova, Mozambique) due to pandemic-related expenditures including cash or food transfers. - Some countries project tightened budgets reflecting cuts in primary expenditures (Democratic Republic of the Congo, Sudan, Timor-Leste, Zambia). - Fiscal expansions contained in some countries due to cost-effective control measures or use of off-budget measures and capital spending reductions (Vietnam, Bangladesh). - Revenue impacts: - Revenues of oil exporters in real terms are projected to decline, on average, by 15 percent. - Real revenues of non–oil exporters are projected to decline by 9 percent, on average. - Several countries’ real revenues are projected to increase by more than 5 percent (Burkina Faso, Chad, Haiti, Niger, Senegal), driven by grants. - Expenditure adjustments: - Aggregate expenditures relative to GDP are projected to decrease relative to the January 2020 WEO 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. - Examples of subsequent fiscal responses where conditions allowed: - Sudan announced a quasi-universal basic income program financed with official support. - Nigeria revised its 2020 budget to reallocate more resources to COVID-19–related spending. - Angola increased several taxes in July and is considering other non-oil revenue measures. - Supplementary budgets added health spending (Papua New Guinea) or transfers to help subnational responses (Somalia). - Debt and debt-service constraints: - Countries entered the pandemic with growing debt levels and debt-service burdens, likely constraining fiscal responses. - Debt service relative to tax revenues will exceed 20 percent in over half of low-income developing countries in 2020 and 2021. - Public debt is expected to remain elevated in 2021 because countries will still face daunting spending needs to meet development goals. - 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, increasing reliance on nonconcessional debt. - Debt restructuring may be required to stabilize debt in some countries. - Official sector response: - Bilateral debt relief through debt service suspensions by the G20 and Paris Club creditors under the Debt Service Suspension Initiative. - Debt relief from international financial institutions (for example, the IMF’s Catastrophe Containment and Relief Trust). - Financing to help the poorest countries cover COVID-related expenditures. *International Monetary Fund | October 2020* ### CHAPTER 1 FISCAL POLICIeS TO ADDReSS The COvID-19 PANDeMIC ### CHAPTER 1 FISCAL POLICIeS TO ADDReSS The COvID-19 PANDeMIC ### Major fiscal and debt projections - Table 1.2 (General Government Debt, 2012–25) highlights projected gross debt trajectories: - World gross debt: 79.6, 78.3, 78.6, 79.7, 82.7, 81.4, 81.7, 83.0, 98.7, 99.8, 100.3, 100.5, 100.4, 100.1 (percent of GDP for 2012–2025 respectively). - Advanced Economies gross debt: 106.8, 105.3, 104.8, 104.2, 106.8, 104.5, 104.0, 105.3, 125.5, 125.6, 125.6, 125.8, 125.7, 125.5 (percent of GDP for 2012–2025 respectively). - United States gross debt: 103.3, 104.9, 104.5, 104.6, 106.6, 105.7, 106.9, 108.7, 131.2, 133.6, 134.5, 135.2, 136.0, 136.9 (percent of GDP for 2012–2025 respectively). - Japan gross debt: 228.7, 232.2, 235.8, 231.3, 236.4, 234.5, 236.6, 238.0, 266.2, 264.0, 263.0, 262.8, 263.0, 264.0 (percent of GDP for 2012–2025 respectively). - Net debt (selected series): - World net debt: 65.9, 65.1, 65.4, 66.8, 69.5, 68.2, 68.7, 69.5, 87.4, 88.1, 88.9, 89.0, 89.0, 89.3 (percent of GDP for 2012–2025 respectively). - Advanced Economies net debt: 76.9, 76.0, 75.9, 75.9, 77.6, 76.0, 76.1, 76.7, 96.1, 96.4, 97.3, 97.5, 97.7, 98.3 (percent of GDP for 2012–2025 respectively). - Japan net debt: 145.3, 144.7, 146.6, 146.4, 152.0, 149.8, 153.5, 154.9, 177.1, 178.9, 178.6, 178.5, 178.7, 179.7 (percent of GDP for 2012–2025 respectively). - Source and methodology notes: - Source: IMF staff estimates and projections. - Projections are based on IMF staff assessments of current policies. - All country averages are weighted by nominal GDP converted to US dollars (adjusted by purchasing power parity only for world output) at average market exchange rates in the years indicated. - In many countries, 2020 data are still preliminary. - For cross-economy comparability, gross and net debt levels reported by national statistical agencies for countries that have adopted the 2008 System of National Accounts (Australia, Canada, Hong Kong SAR, United States) are adjusted to exclude unfunded pension liabilities of government employees’ defined-benefit pension plans. - Gross debt refers to the nonfinancial public sector, excluding Eletrobras and Petrobras, and includes sovereign debt held on the balance sheet of the central bank. ### Fiscal response to the pandemic — scale, composition, and constraints - IMF guidance (April 2020 Fiscal Monitor): urged large, timely, temporary, and targeted fiscal support for people and viable firms most affected by COVID-19, including informal sectors. - Observed trade-offs and patterns: - Timeliness often came at the expense of targeting; durations were frequently extended due to continued lockdowns. - Countries that implemented strong early containment (mobility restrictions before total COVID-19 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, while those with initially high public debt deployed larger off-budget support. - Fiscal policy actions were massive in advanced economies but constrained by financing in many emerging markets and especially low-income developing countries. - Reaching affected groups proved challenging in countries with large informal sectors. - Financing flows and debt vulnerability for low-income countries: - Emergency liquidity from multilateral development banks to countries eligible for the 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). - Even so, more than half of low-income developing countries are now in debt distress or at high risk of debt distress. ### Human and poverty impacts; social assistance effects - Poverty projections and social assistance: - Based on projected decline in per capita incomes (June 2020 World Economic Outlook Update), 100 million to 110 million people globally would be expected to enter extreme poverty relative to the pre-COVID projection, reversing the decades-long declining trend. - 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. - The October 2020 World Economic Outlook revision suggests global poverty estimates are likely at the lower end of that range, although uncertainty remains high. - The projected increase in extreme poverty would be concentrated largely in emerging market and developing economies in sub-Saharan Africa and South Asia. - Distributional effects: - Income inequality within countries is expected to increase as the pandemic affects low-income individuals disproportionately. ### Public health spending and preparedness cost estimates - Estimates of health capacity increases (selected advanced economies: G7, Korea, Spain): - 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. ### Effectiveness of nonhealth fiscal measures - Cash transfers: - Particularly effective in protecting the poor. - Larger impact on total consumption when targeted to those most in need or most likely to spend (for example, the unemployed). - United Kingdom: increase in the means-tested universal credit allowance is estimated to fully offset the adverse impact of the pandemic on poverty. - United States: higher-income households that received “stimulus checks” under the Coronavirus Aid, Relief, and Economic Security Act have spent less than lower-income households that received those checks, and on goods less affected by the lockdown, limiting aggregate impact. - Unemployment benefits were found more effective than “stimulus checks” in reaching households with a higher propensity to consume additional resources. - Cash and in-kind transfers in EMDEs: - Provided better coverage of vulnerable households than unemployment benefits where informal sectors are large. - Some countries expanded cash benefits rapidly using citizen identification systems linked to socioeconomic databases and digital payment platforms (India, Togo, Turkey). - Some low-income developing countries provided in-kind (food) assistance effectively through community organizations (Nepal, Rwanda). - In Latin America, existing social safety nets were expanded to better cover the structurally poor, but those at risk of temporary poverty (informal lower-middle-income workers who lost jobs) were often not reached, highlighting the need to expand social insurance coverage. - Wage subsidies and job retention schemes: - Wage subsidies for furloughed workers or firms with revenue losses have been effective in preserving employment linkages. - Risk: if maintained too long after reopenings, wage subsidies could delay necessary labor-market reallocation. - Take-up of job retention schemes averaged one-quarter of employees in OECD economies, exceeding half of employees in two cases (France, New Zealand). - Denmark: strong take-up of wage subsidies correlated with fewer job separations. - Headline unemployment rates increased less in economies channeling more labor market support through wage subsidies (Australia, United Kingdom) than those relying more on unemployment benefits (Canada, United States). - Replacement rates in job retention schemes tended to be higher than in unemployment benefit programs. ### Policy implications and recommended priorities (as reflected in analysis) - Fiscal measures should be: - Large, timely, temporary, and targeted to people and viable firms most affected by the crisis, including informal-sector workers. - Priorities for health-related fiscal policy: - Scale up testing, tracing, and treatment capacities; estimated incremental costs (intensive-care and testing increases) are modest in percent-of-GDP terms for selected advanced economies (0.3 to 0.5 percent of GDP). - Strengthen pandemic preparedness, recognizing capital and operating costs are likely higher in economies with weaker health systems. - Social protection and labor-market policies: - Expand social assistance and social insurance coverage to reach informal and temporarily affected workers. - Use citizen identification and digital payment platforms to expand cash transfer coverage rapidly, transparently, and safely. - Use wage subsidies to preserve employment relationships during deep but temporary lockdowns, but design exit strategies to avoid delaying necessary reallocation after recovery. - Debt and financing considerations: - Recognize constraints on fiscal support in many emerging markets and low-income developing countries due to financing limits and debt distress risks. - Leverage multilateral support and coordinate debt-relief measures where appropriate to address immediate liquidity and solvency pressures. *Source: CHAPTER 1 FISCAL POLICIeS TO ADDReSS The COvID-19 PANDeMIC — International Monetary Fund | October 2020* ### CHAPTER 1 FISCAL POLICIeS TO ADDReSS The COvID-19 PANDeMIC ### CHAPTER 1 FISCAL POLICIeS TO ADDReSS The COvID-19 PANDeMIC ### Job retention, unemployment, and labor reallocation - Wage subsidies and job-retention schemes have preserved job matches but may have postponed rather than averted larger job loss because subsidies will be phased out eventually—after more than a year in some cases (France, Germany). - 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 (Utermöhl, Ozyurt, and Subran 2020). - About one-third of pandemic-induced firm-level lay-offs in the United States are estimated to be permanent, requiring job reallocations. - Overextended job retention schemes and overly generous unemployment benefits could delay necessary reallocations (Barrero, Bloom, and Davis 2020). - Participation in job retention schemes reached one-quarter of employees in OECD countries, and more than half in a few countries (data refer to the end of May 2020, except for Luxembourg and Switzerland—end of April 2020). ### Loans, guarantees, and equity injections - Loans and guarantees aimed to provide liquidity to cash-strapped businesses; many countries report low take-up (for example, Germany, Italy, United Kingdom). Low take-up may reflect: - Administrative capacity constraints or program conditionality on the supply side. - Liquidity buffers in less-affected sectors and firms and the availability of other government support (grants, wage subsidies) on the demand side (Anderson, Papadia, and Véron 2020). - Private debt overhang and elevated uncertainty. - In the United States, forgivable loans under the Paycheck Protection Program initially had low take-up, partly reflecting administrative complexities; the program has had a modest effect on employment in small businesses, likely because the less-affected businesses primarily received these loans (Chetty and others 2020; Cororaton and Rosen 2020). - For SMEs, low utilization can reflect design issues such as large loan size and low coverage of guarantees. The Bounce Back Loan Scheme in the United Kingdom had 20 times more SME loans than the earlier Coronavirus Business Interruption Loan Scheme due to lower maximum loan size and higher government guarantee (Dreyer and Naygaard 2020). - In the euro area, banks reported that government guarantees played a significant role in keeping credit standards favorable for SMEs (European Central Bank 2020). - Equity injections have often been necessary to prevent bankruptcies of hard-hit strategic firms, such as national airlines, but risk delaying sectoral reallocation. Examples: - Convertible loans to national airlines in New Zealand and Singapore with options to convert bonds into common equity to better share risks and rewards (OECD 2020c). - France combined airline support with conditionality on cutting emissions to help “greening” the recovery. - The mere existence and large size of loan and guarantee programs likely support market confidence and economic activity and may help explain low take-up thus far. ### Tax measures and payment forbearance - Tax measures have largely consisted of deadline extensions and payment deferrals (OECD 2020f; Djankov and Nasr 2020), supporting household and firm liquidity, though to a lesser extent than debt moratoriums and wage subsidies because tax burdens are already limited by lower sales and profits (OECD 2020b). - Deferred taxes may not be recovered in full if they merely delay severe cash flow problems, creating fiscal risks for governments. - Other tax and related measures noted: - Tariff waivers on medical supplies (Colombia, Vietnam) and quick release procedures at customs (Philippines). - Accelerated VAT refunds (France, Indonesia), new and expanded loss carryback rules (China, New Zealand, Japan), and accelerated depreciation deductions (Australia). - Reduced social security contributions (Argentina, China, France, Korea) to protect vulnerable households and affected firms. - Tax-based support may be less effective in some emerging market and developing economies because of limited reach to informal sectors. - Payment forbearance policies (mortgage moratoria, utility and rent relief, loan moratoria) provided short-term relief to households and businesses, including informal sectors (examples: United States, Argentina, Colombia, Japan, China, Turkey). ### Magnified fiscal risks - Sizable fiscal risks arise from a protracted economic downturn, volatile global financial conditions amid high and rising public and private debt, abrupt commodity price movements, and announced contingent liabilities. - Quantitative easing and quasi-fiscal activities by central banks could deteriorate central bank balance sheets if supported firms default on central bank holdings of their bonds or commercial paper not covered by a government guarantee. - Specific magnified risks highlighted: - A protracted economic downturn: Absence of herd immunity or widespread availability of effective therapies or a vaccine could constrain recovery, leading to more bankruptcies, deterioration in bank balance sheets and fiscal support for banks, and greater fiscal resources needed to support and retrain unemployed workers. Firms that received early support may no longer be viable and budget resources should shift elsewhere. - Tightening of financial conditions: Rapid growth in sovereign and private debt stocks, particularly among nonfinancial corporations, leaves budgets exposed to changes in financing conditions. Abrupt market tightening or local currency depreciation would spike borrowing costs and add to debt servicing problems, especially in low-income developing countries with large informal sectors and weak administrative systems. - Commodity market volatility: Commodity price fluctuations impact exporters and importers differently; a sharp fall in oil prices would further undermine budgets of oil exporters but could provide relief to importers. - Contingent liabilities: Guarantees and other contingent liabilities may be called in adverse scenarios, adding substantially to debt vulnerabilities. Quantification is challenging while the pandemic is ongoing and depends on program size, projected guarantees issued, expected downturn duration, and expected recovery rates in default. - Upside risks include rapid development and distribution of a safe, affordable, and effective vaccine; productivity-boosting structural changes; or faster-than-expected normalization in reopened areas—each would reduce necessary fiscal support. ### Fiscal roadmap for the recovery and phase-based strategies - Public policies to bring the pandemic under control—developing vaccines and treatments and ensuring universal low-cost access—are paramount for safeguarding economies and public finances. Multilateral coordination and financial support for developing economies are vital. - Reviving growth and job creation is essential to reverse poverty and inequality and improve public finances. Fiscal strategies should be flexible and adapt to three phases of the pandemic: 1. The outbreak with lockdowns. 2. Partial reopening. 3. A high degree of control of the virus through medical advances. - Throughout, full transparency, good governance, and costing of all fiscal measures are crucial given their size, exceptional nature, and speed of deployment. - Phase 1 (Outbreak with lockdowns): Fiscal policy should focus on health and emergency services and lifelines for affected people and firms—wage subsidies, expanded social protection (including informal workers), deferred tax collection, subsidized loans, and loan guarantees to allow firms to “hibernate.” Use of public banks and complementary central bank/regulator actions (delaying bankruptcies or evictions) is recommended. - Table 1.3 (Fiscal Strategies during Different Phases of the Pandemic) outlines general applicability of fiscal measures across phases; key points include: - Household income support: Cash or in-kind transfers are effective in lockdowns; transition and better targeting during reopening; reconsider within reforms to enhance social protection systems in recovery. - Unemployment benefits: Expand coverage and extend duration in lockdowns; refine to preserve work incentives as unemployment normalizes; key component when enhancing social protection systems. - Short-term work/job-retention schemes: Yes in lockdowns; reduce use to encourage movement to new jobs during reopening if needed; reduce access for prolonged cases in recovery. - Temporary hiring subsidies and active labor market policies: Not for immediate lockdowns; plan/initiate during reopening as supply disruptions ease; scale up training and skills programs in recovery, tailored to structural transformation. - Public investment: Plan in lockdowns for next phase; boost maintenance and public works during reopening emphasizing job creation and green recovery; scale up quality investment with sustainable financing in recovery. - Tax measures: Temporary deferral of taxes and social security payments is appropriate in lockdowns; targeted deferrals during reopening; tax measures generally not recommended as a blanket tool without targeting and consideration of fiscal space. - Loans, guarantees, and solvency support: Use in lockdowns with conditionality (preserve jobs, restrict dividends/executive pay); refine and tighten generosity during reopening to ensure timely exit and manage fiscal risks; aim for timely exit from equity interventions in recovery. - Debt restructuring: Not in early lockdowns except possible moratoria; prepare streamlined restructuring frameworks during reopening; consider restructuring in recovery to facilitate reallocation and exit of nonviable firms. - Policymakers must tailor measures to country-specific conditions and ensure measures are adapted as countries move through phases; setbacks and different country timetables are expected. *International Monetary Fund | October 2020* ### 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 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 lifelines with broader fiscal stimulus measures is unlikely to be cost-effective because the recovery is expected to be uneven, with supply disruptions and depressed demand concentrated in certain sectors because of health concerns. - For countries with fiscal space, accelerate job-intensive public investments such as maintenance or public works, since such initiatives are less disrupted by social distancing restrictions and can crowd in private investment. - With limited fiscal space, 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 large 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. - Consider revenue-enhancing measures: - increase tax compliance and progressivity of taxes on more affluent and less-affected groups; - reforms to modernize business taxation, including multilateral cooperative design of international corporate taxation to respond to digital economy challenges; - design 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 prices 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, phase out or modify exceptional support 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 and complement with hiring incentives; - 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). ### Selective Support to Firms to Help Them Reopen - Government support should be more selective in this phase to limit costs and avoid obstructing necessary economic adjustments or distorting competition; have a clear exit strategy as the economy recovers. - Support should be directed to otherwise viable firms whose operations are impaired by health risks or social distancing restrictions, or to firms crucial for the economy to function. - Fiscal strategy could include risk-sharing with investors and creditors. - Examples of support instruments: - Liquidity support such as government loans and guarantees, especially if banks remain reticent to lend; gradually reduce generosity (for example, use of partial guarantees and more access conditions). - Solvency support prioritizing systemic firms where bankruptcies could disrupt supply chains or 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. - Support for SMEs is particularly important given vulnerabilities and employment weight; options include: - temporary debt repayment moratoria or temporary suspension of insolvency rules (examples cited: Egypt, Ghana, Kazakhstan); - securitizing SMEs’ debt with government guarantees (Portugal) or government buying securitized SME debt (Australia); - providing equity or hybrid instruments (for example, convertible bonds); - government financial support to help corporate debt restructurings for SMEs. - In developing economies, reach informal-sector SMEs through institutions serving these groups (micro-credit institutions and informal sector organizations); provide grants or guarantees for bank lending to formal and informal microenterprises and SMEs (examples cited: Gambia, Malaysia) or give temporary relief on payments such as rent and utilities; may need direct support to informal workers. ### Phase 3: The Pandemic under Control - When vaccines and therapies become widely accessible, promote 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 - Appropriate fiscal stance depends on access to financing, debt levels, and extent of scarring (long-lasting damage from bankruptcies, disrupted supply chains, and discouraged workers dropping out of the labor force). - Countries will need to rebuild fiscal buffers over the medium term given large deficits and jump in debt levels, but tightening too fast could undermine the recovery and job creation critical to reduce poverty. - Policy paths: - 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—would balance pro-growth and debt sustainability objectives over the medium term (see Figures 1.18 and 1.19). - For countries with limited fiscal space—especially those with tighter financing constraints—fiscal deficits would need to be reduced faster to prevent debt distress or increases in borrowing costs that could derail the recovery (see Figure 1.20). - Specific numerical and modeling context preserved from the text: - Figure 1.18: normative structural primary balance in percent of potential GDP, covering 2013–25. - Baseline average debt level referenced at 80 percent of GDP. - 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. - Scarring reflects a permanent negative effect of a large negative output gap on the level of potential output. - Figures illustrate desirable policies based on a model where governments pursue both economic stability and debt sustainability. - For countries with a large share of government debt denominated in foreign currency, adopt a more cautious fiscal stance because of possible effects of a currency depreciation. - Countries reliant on sectors facing persistent negative impacts (for example, receipts from oil exports or tourism) face greater challenges managing a weaker economy with tighter fiscal constraints. - Many emerging market and developing economies face setbacks to achieving the Sustainable Development Goals (SDGs) by 2030; they need to boost revenue capacity and seek sustainable financing, including development aid. - Low-income developing countries in or at high risk of debt distress may require upfront adjustments; international cooperation, including support for debt relief (for example, the Debt Service Suspension Initiative) with private sector participation, will be critical. ### Stimulus Measures Should Be Cost-Effective and Targeted to Lower-Income Households - As supply disruptions diminish, temporary fiscal stimulus could have a powerful multiplier effect on aggregate demand and output, particularly where low interest rates reflect high savings among high-income households and low private investment. - 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 (see Figure 1.21). - Temporary provisions for accelerated depreciation or investment tax credits can reduce cost of capital and encourage frontloading of private investment. - Active labor market policies, including reskilling, support reallocation to more productive formal jobs and higher earnings. - For countries with limited borrowing space, combine fiscal instruments to achieve objectives while containing public debt: - Example: raise 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 (see also Chapter 2). - Numerical and modeling notes preserved: - Figure 1.21: tax multipliers plotted such that a positive number refers to an increase in a variable in response to a tax cut measure; short-term multipliers refer to cumulative multipliers at the end of one year and long-term at the end of five years. - Multiplier estimates assume an environment of low growth and low interest rates, and one in which poorer households are cash constrained. - Figure 1.22 scenarios: (1) no fiscal package; (2) slower adjustment including higher transfers and gradual increase in taxes on the high-income group as debt rises; (3) faster adjustment where higher transfers and taxes are raised from year 1 and more aggressively as debt rises. ### Unwind Government Interventions in the Corporate Sector - Prioritize unwinding large public interventions in firms and managing associated fiscal risks. - Implement an effective debt resolution system, including a streamlined restructuring framework and institutional capacity to manage a large number of bankruptcies, to promote smooth reallocation of resources to more productive uses. - Governments, as main creditors for SMEs, can facilitate debt restructuring but must accept losses from unpaid taxes and pandemic-era loans. - Government ownership tends to be associated with weaker firm performance and can distort competition. - Debt restructuring should be authorized by legislation and the process carefully circumscribed to ensure accountability and transparency. ### The Recovery Can Enable Building a More Inclusive and Green Economy - Crisis underscores need for ambitious reform agendas, including investment in human and physical capital, to make economies more resilient and address poverty, inequality, and climate change. - As economies transform and digitalize, reorient expenditures toward investment in people and raising equitable revenues. - Two important fiscal policy tools for addressing income inequality: progressive income taxation and education and health spending. *International Monetary Fund | October 2020* ### 1. Targeted Transfers, Liquidity-Constrained Households ### 1. Targeted Transfers, Liquidity-Constrained Households ### Impact of fiscal packages on output and government debt - Figure referenced: "Figure 1.22. Impact of a Fiscal Package on Output and Government Debt (Percent)". - Visual material indicates trajectories of output (percent deviation relative to no recession) and debt-to-GDP ratio (percent) over years (axes labeled 0–10 years and 0–30 years in figures), but no additional numeric outcomes are stated in the surrounding text excerpt. ### Strengthening social protection and targeting support - Finding: The crisis has exposed structural gaps in social protection systems that have contributed to a rise in inequality. - Policy recommendation: Ensure universal access to basic goods (for example, food and shelter) and services (for example, health and education) during crises. - Quantified policy impact: 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). - Operational priorities for emerging market and developing economies with less-developed safety nets: - Strengthen capacity to reach, target, and deliver benefits to the most vulnerable households. - Build reliable universal identification systems. - Ensure safe and transparent delivery mechanisms (for example, digital transfers). - Maintain up-to-date and integrated socioeconomic data to identify vulnerable households and provide timely and adequate safety nets. - Operational priorities for advanced economies with stronger safety nets: - Improve outcomes of existing programs by extending coverage through enhanced means testing. - Better preserve work incentives (citations: McKay and Reis 2016; Landais, Michaillat, and Saez 2018). - Additional note: Where budget increases are not feasible, countries can consolidate inefficient and fragmented programs to enhance capacity to reach larger shares of the population. ### Adequacy and coverage of social protection programs - Figure referenced: "Figure 1.23. Adequacy and Coverage of Social Protection Programs (Percent, left scale; percent of GDP, right scale)". - Definitions given: - Adequacy = total transfers received by beneficiaries as a share of the pretransfer total income in the lowest-income quintile of individuals. - Coverage = share of the lowest-quintile individuals who receive social protection benefits. - Regional labels shown in figure: 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. - Finding: Social protection programs in low-income developing countries have low coverage and in many emerging market developing economies provide insufficient benefits. ### Private debt vulnerabilities and public-sector risk (Box 1.1) - Key statistics: - Nonfinancial corporate and household debt trended upward for two decades, reaching almost 150 percent of GDP in 2019 and exceeding public debt by a large margin in most G20 countries (Figure 1.1.1). - Corporate capital-raising in the first half of 2020 reached $5.4 trillion globally, including $3.9 trillion since the start of March. - Governments have announced guarantee programs equivalent to $3.8 trillion in response to the pandemic. - Cumulative gross support to financial institutions in 37 countries following the global financial crisis was $3.5 trillion. - Risks and channels: - Excessive private debt can suppress growth and migrate to the public balance sheet through: 1. Direct public support to corporations or their creditors. 2. Calls on public guarantees on private debts. 3. Countercyclical fiscal responses to corporate deleveraging episodes. - Policy implications: - Risks from high private debt may ultimately require fiscal action to help repair private balance sheets. - Policies that support equitable and rapid bankruptcy procedures can help. - For strategic or systemic firms with unsustainable debt, it may be in the public interest for governments to absorb some of the debt, but direct support should not bail out owners (citation: Bernardo, Talley, and Welch 2016). - Consider reconsidering public policies that encourage debt accumulation (for example, the deductibility of interest for tax purposes) (citation: De Mooij 2012). ### Greenness of the fiscal response to COVID-19 (Box 1.2) - Finding: Little of the fiscal response to date has been "green." - Quantified examples and targets: - By country examples: France allocated almost 1 percent of GDP to green measures. - The European Union announced a 30 percent green spending target for its 5.5 percent of GDP stimulus package. - Types of green measures observed: - Mostly direct budget expenditures such as incentives for more energy-efficient vehicles (China, France, Italy). - Loans and grants for green investments (examples: cleaning inactive oil wells in Canada; modernizing commercial vehicles in Germany; building climate-resilient infrastructure in Japan). - Climate-negative measures: - Mainly bailouts for emissions-intensive firms (examples: airlines in Brazil, China, and France). - Note: To date, only France attached significant green conditionality to its bailout. - Policy recommendations: - Greening the recovery presents a major opportunity as countries move from crisis containment to recovery. - Introduce more robust carbon pricing as a core policy: it encourages lower energy use, shifts to cleaner alternatives, and generates revenues that can finance 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 sector investment. - Undertake and publish climate impact assessments and introduce green budgeting to increase transparency, awareness, and accountability for climate-sensitive policymaking. - Historical precedents: - Korea after the global financial crisis: launched a multiannual large-scale infrastructure program focused on climate-relevant public infrastructure (for example, river restoration). - United States after the global financial crisis: leveraged support of auto firms to introduce tougher emissions standards in a "green-bargain" with the industry. ### An unprecedented fiscal response: scale and composition (Box 1.3) - Aggregate size of fiscal response: - By September 11, 2020, countries had announced discretionary fiscal measures averaging close to 12 percent of GDP. - Advanced economies: - Direct budget support committed through September 11 is equivalent to 9.3 percent of GDP. - An additional 11 percent of GDP has been committed to liquidity support (examples: equity injections, loans, guarantees, quasi-fiscal activities). - Large components of support aimed at workers and employers: wage subsidies (Australia, Canada, Japan); short-term work schemes (France, Germany, Spain, United Kingdom); forgivable loans contingent on employment protection (United States). - Household support included expansions of unemployment benefits (France, Japan, Spain, United States); sickness, family, and childcare benefits (Japan, Spain, United Kingdom, United States); and cash transfer schemes (Canada, Japan, Spain, United States). - Equity injections particularly for hardest-hit companies such as airlines (France, Germany, Scandinavia). - Emerging market and middle-income economies: - Total fiscal support through September 11 amounts to about 6 percent of GDP, 3.5 percentage points of which is committed on budget. - Oil exporters facing a double shock deployed smaller fiscal packages on average, prioritizing health spending in some cases (Iran, Saudi Arabia). - Budget measures often included public works (Argentina, China, Indonesia), job retention schemes including forgivable loans (Mexico, Russia) and wage subsidies (Argentina, Saudi Arabia, Turkey), and household support via expanded unemployment benefits (China, Indonesia, Russia) and targeted cash and in-kind benefits (Argentina, Brazil, India, South Africa). - Public sector equity injections, loans, and guarantees have been more modest on average than in advanced economies, exceeding 5 percent of GDP in only a few cases (Brazil, Peru, Turkey). - Low-income developing countries: - Total fiscal support announced through September 11 is 1.8 percent of GDP, largely through budgetary measures. - Spending on health services amounted to 0.3 percent of GDP. - Large share of support allocated to protecting households, including cash and in-kind (food) transfers (Bangladesh, Ethiopia, Kenya, Nigeria, Senegal); temporary unemployment benefits (Honduras, Vietnam); and utility subsidies (Ghana, Senegal). - Distribution of fiscal support by beneficiary (figure referenced: "Figure 1.3.2. Distribution of Fiscal Support, by Beneficiary (As of September 11, 2020; percent of total)"): - Major beneficiary categories shown include: Households; Employment; Larger firms; SMEs; Healthcare; Public works; Equity and loans; Guarantees and quasi-fiscal activities; Additional spending and forgone revenue. *Source: IMF Fiscal Monitor chapter excerpts (October 2020).* ### 21. https://www.piie.com/blogs/realtime-economic-issues- ### PUBLIC INVESTMENT FOR THE RECOVERY ### Introduction and overarching rationale - Immediate government focus during the COVID-19 crisis: address the health emergency and provide lifelines for vulnerable households and businesses. - Governments now also need to: prepare economies for safe and successful reopening, foster recovery in employment and economic activity, and facilitate transformation to a post-pandemic economy that can be more resilient, more inclusive, and greener. - Public investment can make a crucial contribution toward these goals (see a discussion of the fiscal strategy for the recovery in Chapter 1 and Table 2.1). - From a macroeconomic standpoint: - The case for public investment is strongest in advanced economies and many emerging market economies that—with nominal interest rates and inflation expected to remain at historic lows—can easily finance an investment scale-up. - In many cases, borrowing to finance high-quality investment will be desirable, since cheap financing lowers the bar for whether to undertake an investment. - The assets created generate taxable returns and are valued by markets when they price sovereign risk (October 2018 Fiscal Monitor). - Policymakers should ensure that the amount and quality of public investment are such as not to pose risks by overly worsening debt dynamics, especially for countries that do not issue reserve currencies. - Abrupt changes in global market sentiment can result in sudden increases in financing costs (Caceres, Guzzo, and Segoviano 2010; Lizarazo 2013), and sovereign spreads tend to increase only shortly before debt crises (Mauro and Zhou 2019). ### Macroeconomic effects and timing - With ample underused resources, public investment can have a more powerful impact than in normal times. - Public investment and its crowding-in effects on private investment could mitigate secular stagnation and the savings glut that predate COVID-19 (Rachel and Summers 2019; Eggertsson, Mehrotra, and Robbins 2019) and have been exacerbated by the crisis. - Public investment can encourage business investment that might otherwise be postponed due to: - uncertainty about the course of the pandemic; - weakened private sector balance sheets; - losses in human capital because of unemployment; - skill mismatches as demand shifts from high-contact sectors to those that permit social distancing. - For low-income developing countries and some advanced and emerging market economies: - deteriorating debt dynamics and tight financing conditions constrain investment, especially where there is high external debt denominated in foreign currency. - sizable market borrowing could increase risk premiums for both the public and private sectors, undermining short-term growth benefits (Huidrom and others 2019). - preliminary information indicates financing constraints and competing spending priorities have caused many middle- and—especially—low-income countries to put domestically financed investment projects on hold (Chapter 1). - Even so, a gradual scaling-up of public investment financed by borrowing could yield positive short- and long-term multipliers, provided interest rates do not increase too much (Buffie and others 2012; Online Annex 2.1) and governments choose and manage projects to maximize economic returns. - Official support, especially if combined with private finance, would help middle- and low-income countries scale up public investment significantly. ### Long-term implications and priorities - The quality and content of fiscal policy packages—and within them, public investment choices—will be key to supporting the economy and creating jobs in the near term and will determine socioeconomic outcomes for decades. - Stakes are high: large fiscal packages are necessary now but will have long-lasting implications directly (expenditure and investment choices) and indirectly (calling for lower discretionary spending or higher taxation if borrowing costs rise). - Beyond macroeconomic implications, public investment is essential to: - raise long-term economic growth; - progress toward the Sustainable Development Goals (SDGs); - strengthen resilience to crises. - Public investment can help reduce inequality by fostering structural transformation and facilitating regional convergence in low-income economies (Fabrizio and others 2017). - Public investment has the advantage of preserving fiscal space because it is by nature temporary; however, investments must be chosen and implemented under conditions that maximize social payoffs. ### Recent trends and gaps in investment - Investment needs were large before the pandemic and have increased since its onset. - Public investment has slowed since the 1990s, reducing the capital-stock-to-GDP and public-to-private-capital ratios in all income groups (Figure 2.1; China is an exception). - Note: In China, public capital stocks have increased, but traditional infrastructure investment may have reached a point of low returns, as the halving of total factor productivity growth in China after 2009 suggests (IMF 2019). - Public investment ratios have been falling, especially in the health, housing, and environmental protection sectors, weakening societies’ resilience to COVID-19, whereas investments in education and economic infrastructure have been preserved (Figure 2.2). - Physical infrastructure growth example: - Between 2007 and 2016, the total number of miles of roads increased by a cumulative 56 percent in low-income countries and by 33 percent in emerging market economies; the number was nearly unchanged in advanced economies (as implied by context). ### Implementation guidance and project selection (Table 2.1 summary) - Recovery phases and public investment roles (as summarized in Table 2.1): - Phase 1. Great Lockdown - Priority: Save lives and livelihoods - Key fiscal policies: Lifelines for people and firms - Role of public investment: Continue projects where safe, start planning - Preferable project characteristics: Maintenance - Public investment management actions: Review portfolio of planned and active projects - Priority sectors: Health - Phase 2. Partial Reopening - Priority: Safe reopening where possible - Key fiscal policies: Preserve lifelines; target support better; encourage workers to take new jobs - Role of public investment: Boost maintenance and job-rich projects; reassess priorities; prepare pipeline - Preferable project characteristics: Maintenance; ready for implementation; small-size, job-intensive with large short-term multiplier - Public investment management actions: Review, reprioritize, restart feasible projects put on hold; plan for new priorities; prepare pipeline of appraised projects to be implemented within 24 months - Priority sectors: Health, including R&D in vaccine and therapeutics; water and sanitation; digital; safe buildings, schools and transportation - Phase 3. Post-Pandemic - Priority: Transform to more inclusive, smart, and sustainable economies - Key fiscal policies: Depending on fiscal space, consider fiscal stimulus, repair balance sheets - Role of public investment: Satisfy infrastructure needs and support progress toward the SDGs; increase resilience to crises - Preferable project characteristics: Large, transformational projects with large long-term multiplier - Public investment management actions: Strengthen project planning, budgeting, and implementation practices to improve public investment efficiency - Priority sectors: Health; climate change adaptation and mitigation; digital - Note: Countries do not necessarily progress smoothly through all phases of pandemic. Appropriate fiscal responses are country-specific depending on fiscal space, the development of the pandemic, and the strength of the recovery. Measures included are not exhaustive. R&D = research and development; SDGs = Sustainable Development Goals. *International Monetary Fund | October 2020* ### CHAPTER 2 PubLIC INveSTMeNT FOR The ReCOveRy ### CHAPTER 2 PubLIC INveSTMeNT FOR The ReCOveRy ### Investment needs and gaps - Digital access growth (2007–2018): - low-income countries: from 3 percent to 32 percent - emerging market economies: from 16 percent to 72 percent - advanced economies: from 64 percent to 86 percent - Additional investment needed through 2030 to reach the SDGs for roads, electricity, water, and sanitation: - emerging markets: 2.7 percent of GDP - low-income developing countries: 9.8 percent of GDP per year - Energy investments (public and private) consistent with a 2°C target: - would have to rise from 2.0 to 2.3 percent of GDP by 2030 - Public investment composition averages (2000–18): - Economic affairs: 1.2 percent of GDP - Education: 0.4 percent of GDP - Health: 0.3 percent of GDP - Others (general public services, defense, social protection, housing, and so on): 1 percent of GDP - Environmental protection (waste management, protection of biodiversity, and so on): 0.17 percent of GDP ### Goals of the chapter - Assess how increasing public investment can aid recovery from the COVID-19 pandemic by addressing: 1. How investment can be accelerated and scaled up in the near term while retaining quality 2. To what extent investment will foster job creation 3. How the fiscal multiplier of investment could depend on different circumstances before and after the pandemic is under control 4. How investment can render societies more resilient to health crises and climate change ### A timely and effective push to investment — four immediate steps - Focus on maintenance of existing infrastructure - Review and reprioritize active projects - Create and maintain a pipeline of projects that can be delivered within a couple of years - Start planning for new development priorities stemming from the crisis ### Maintenance and COVID-19-proofing - Rationale for maintenance during a crisis: - Maintenance projects are relatively small, of short duration, and often less complex - Lower infrastructure usage during the pandemic makes maintenance less disruptive - Maintenance preserves asset value, sustains service quality, prevents hazards, and limits waste - Empirical examples and impacts: - US American Recovery and Reinvestment Act of 2009: about 60 percent of funds allocated to highways were for repair or improvement; most associated projects were completed within two years - Fixing water network leaks in developing countries could prevent losing the equivalent of the daily needs of 200 million people - Rehabilitation and replacement costs increase by 50 percent in transportation and 60 percent in water and sanitation if routine maintenance is not performed - Maintenance funding gaps and needs: - In advanced economies, maintenance spending on roads, railways, waterways, and sea and air transport infrastructure ranged between 0.1 and 1 percent of GDP in 2018 - United States: one-time expenditure needed to cover the backlog of highway and bridge repairs estimated at 3.5 percent of GDP; 20 percent of dams considered to have high hazard potential - Emerging market and developing economies: estimated average annual maintenance costs of 2.75 percent of GDP ### Review and prioritization of active projects - Crises affect public investment portfolios through interruptions, delays, and financing issues - Empirical observation: - Advanced economies have maintained investment spending during the Great Lockdown in available monthly data - About half of emerging market and developing economies for which data have been collected have had to cut investment spending, likely owing to financing constraints - Projections and quantitative impact: - The October 2020 World Economic Outlook projects that public investment will be lower in 2020 than in 2019 in 72 out of 109 emerging markets and low-income developing countries - The average expected reduction in public investment is 1 percent of GDP for these 72 countries - Recommended actions for active projects: - Establish well-coordinated active monitoring systems differentiated by project size, complexity, and stage - Revisit cost-benefit analyses in light of updated assumptions - Renegotiate financing and procure new contracts where needed - Identify new risks created by the crisis and plan mitigating measures ### Establishment of a pipeline of projects - Risks of selecting projects solely on immediate readiness: - May impede quality and allocation efficiency by discarding projects with greater potential - Readiness can be misassessed; administrative burden and red tape can slow implementation - Evidence of delays in absorbing existing funds: - In Europe, with one year remaining in the 2014–20 plan, several countries had spent only 40 percent of the European Structural Funds allocated - Shortcomings in appraisal and selection: - More than half of the 63 countries that have undergone an IMF Public Investment Management Assessment do not effectively maintain a pipeline of projects - Recommendations for pipelines: - Prepare a pipeline of carefully appraised projects that can be financed and implemented within 24 months - Disclose selection criteria emphasizing strategic relevance, feasibility and affordability, and implementation readiness - Where appraisal is weak, establish a small expert task force to review viability of major projects - Fast-track preparation through expedited appraisal and selection procedures or temporary procurement exemptions, accompanied by transparency and quality control safeguards ### Planning for new development priorities - Governments should start planning now for projects that accompany likely economic and social transformations post-crisis - Prioritize investments that: - Reduce the likelihood or impact of future crises, including pandemics and climate change - Foster digitalization and access to digital technologies - Project preparation timelines: - Smaller projects can be prepared within a year - Preparation typically takes five years or more for large infrastructure projects - Figure on duration of infrastructure projects: Preparation: 3–8 years; Implementation: 3–7 years; Total Duration: 6–15 years ### Maintaining quality when scaling up public investment - Requirements to secure long-term growth dividends: - Sound project planning and preparation - Country ownership of projects - Avoid scaling up public investment too much and too fast - Efficiency and effectiveness concerns: - On average, more than one-third of resources spent on public infrastructure are lost to inefficiencies - Evidence on long-term growth benefits of large, enduring scaling-ups is mixed - Governance and selection measures to maintain quality: - Use life cycle approaches for public investment projects, including identifying maintenance needs at appraisal - Secure funding for maintenance and invest in systems to collect asset performance data - Integrate capital and current expenditure budgets with a medium-term perspective - Exhaustively report maintenance spending and include capital maintenance in public investment strategy reviews to assess replacement versus maintaining existing assets and potential leapfrogging to new technologies _International Monetary Fund | October 2020 — CHAPTER 2 PubLIC INveSTMeNT FOR The ReCOveRy_ ### CHAPTER 2 PubLIC INveSTMeNT FOR The ReCOveRy ### CHAPTER 2 PubLIC INveSTMeNT FOR The ReCOveRy ### Risks, governance, and absorptive-capacity constraints - Fast increases in public investment carry the risk of facilitating corruption because project selection and procurement are particularly vulnerable when public officials have higher discretion and complex projects hamper the use of price comparators. - Public investment management and fiscal transparency practices that can mitigate corruption risks include: - publication of project selection criteria; - use of e-procurement systems and project-monitoring platforms; - implementation of alert systems (“red flags”). - Periods of rapid scaling-up can produce less successful project outcomes because implementing multiple new projects simultaneously requires technical and managerial resources that cannot be expanded in the short term; absorptive-capacity constraints and supply bottlenecks may inflate costs and delay implementation and completion. ### Evidence on cost overruns and delays (World Bank–financed projects) - Data: more than 2,200 World Bank–financed project reports covering 110 emerging markets and developing economies. - Key empirical findings: - almost 40 percent of projects cost more than the estimated appraisal cost; - 75 percent of projects are delayed beyond their projected completion date at project outset. - Projects approved and undertaken when public investment is significantly scaled up experience larger cost increases and longer delays: - Individual projects can cost 10–15 percent more simply because they are undertaken at a time of particularly high public investment. - In low-income developing countries, scaling up investment by 3 percent of GDP leads to an increase in costs of 6 percent above appraisal costs, as well as delays extending project length by 2.5 percent beyond what was planned. - Other project-level and institutional drivers: - World Bank projects in which the expected rate of return is assessed at appraisal have shorter delays. - Larger and more complex projects (measured by number of sectors spanned) tend to have shorter delays, possibly reflecting more careful planning and design. - Projects funded fully by grants have a time overrun 14 percentage points higher than those funded without grants; a three-year project thus suffers from an extra five-month delay, on average, if it is fully funded by grants. - Country ownership and leadership of local authorities are important elements for project success. - Technical support by multilateral development banks can be beneficial where capacity is limited and can help attract private finance. ### Job creation from public investment - Historical and sectoral job intensities: - US American Recovery and Reinvestment Act created six to eight jobs in the short term per $1 million spent. - Firm-level data across 27 advanced economies and 14 emerging markets (1999–2017) indicate job intensity ranges: - Advanced economies: about two jobs per $1 million invested in schools and hospitals; three jobs per $1 million in electricity. - Emerging market economies: about five jobs per $1 million in roads; eight jobs per $1 million in water and sanitation. - R&D and higher-education job content: - Government R&D spending generates an estimated five jobs per $1 million invested in OECD member countries. - The job content of higher education R&D is twice as high as government R&D. - Green investment and jobs: - In advanced economies, estimated net job intensity: - 8 jobs per $1 million invested in green electricity; - 2–13 jobs per $1 million in efficient new buildings (schools and hospitals); - 6–14 jobs per $1 million in green water and sanitation. - Many renewables jobs do not require high educational attainment; in the United States, less than 20 percent of workers in clean-energy production and energy-efficient occupations have college degrees. - Caveats and amplification: - The presented job counts may underestimate total job creation because they exclude jobs outsourced to companies not in the data set and indirect jobs created through higher demand. - Projects with larger unskilled labor components will create more jobs and can reduce inequality. ### Fiscal multipliers of public investment in the COVID-19 crisis and recovery - Meta-evidence: - Public investment tends to have larger short-term multipliers than public consumption, taxes, or transfers. - Medium- to long-term multipliers for public investment have often been estimated to be larger than 1.0, though estimates vary and can be close to 0. - Multipliers tend to be larger in countries less open to trade, in recessions, and where monetary policy is constrained (fixed exchange rates or effective lower bound). - Role of investment quality: - Advanced economies with good scores on the World Economic Forum’s index of government-spending wastefulness: fiscal multiplier of 0.8 in the first year and above 2.0 at the four-year horizon. - The fiscal multiplier is estimated to be four times smaller for countries with a worse rating. - Similar differentiation is found when using the IMF’s Public Investment Management Assessment. - Important COVID-19-specific initial conditions affecting multipliers: - High levels of public debt can lower fiscal multipliers if deficit-financed investment leads to greater sovereign spreads and higher private financing costs; smaller scaling-up mitigates this effect. - Supply constraints under social-distancing (phase 2 of the pandemic) can reduce fiscal multipliers relative to phases when lockdowns are lifted (phase 3). - Acute uncertainty can either reduce the multiplier (via precautionary saving) or increase it (if investment raises confidence). - Weak corporate balance sheets and high leverage can limit private investment responses and reduce multipliers. - Empirical estimates (72 advanced economies and emerging markets): - An unanticipated positive shock to public investment of 1 percent of GDP increases the level of output by between 0.25 and 0.5 percent in the first year. - The effect after two years is much larger in periods of higher uncertainty; the multiplier could be above 2.0, versus 0.6 for the baseline estimate. - Employment response under high uncertainty: employment increases by between 0.9 and 1.5 percent over two years in response to a shock of 1 percent of GDP to public investment (point estimate 1.2; 10–90 percent confidence interval 0.9–1.5). - Applying the lower- and upper-bound employment estimates to total employment in advanced and emerging market economies (about 2.2 billion workers) implies that increasing public investment by 1 percent of GDP would create between 20 and 33 million jobs. - This macro-based job estimate is larger than the estimate based on direct job creation from sectoral job-content numbers (about 7 million jobs). - Mechanism: public investment shocks may raise confidence and foster private investment that would otherwise be delayed, amplifying output and employment effects. *Source: CHAPTER 2 PubLIC INveSTMeNT FOR The ReCOveRy, IMF, October 2020.* ### 1. Output2. Private Investment3. Employment ### 1. Output2. Private Investment3. Employment ### Fiscal multipliers and public investment effects - Fiscal multipliers higher than 2.0 have been found in high-uncertainty periods in historical studies; similar results for Germany and the United States are cited (Bachmann and Sims 2012; Berg 2019). - The public investment multiplier could be larger than in normal times given the crisis, but high efficiency and good institutional quality are required to reap large benefits. - Countervailing forces: cash constraints and high corporate leverage stemming from the pandemic could lower the fiscal multiplier. - Empirical firm-level findings (about 400,000 firms, 26 advanced economies and 23 EMDEs): - A 1 percent shock in public investment increases private firms’ net investment differentially by liquidity status and leverage. - For firms with low leverage: - Net investment rates increase by 2.5 percent in the first period of the shock. - Cumulative impact is 11 percent after six years. - For firms with high leverage, the multiplier is marginally insignificant statistically. - In advanced economies, support for firms has been extensive; the multiplier can be expected to be higher than 1.0. ### Sectoral targeting and types of public investment that crowd in private investment - Public investments in health care and other social services are associated with sizable increases in private investment at the one-year horizon. - Crowding-in is stronger for private investment in industries critical to resolving the health crisis (communications and transport) and for the recovery (construction and manufacturing). - Health care and social spending have strong Keynesian multipliers because import leakages are small and these sectors are labor intensive. - Long-term benefits and sectoral returns: - Investment in adaptation to climate change often has returns exceeding 100 percent. - Long-term savings from investment in resilience and coping mechanisms can reach 300 percent for droughts and 1,200 percent for storms in sub-Saharan Africa. - Types of public investment with sizable long-term multipliers (expert survey findings): clean-energy infrastructure, energy efficiency upgrades for buildings, and green spaces. ### Investment in resilience and the role of the international community - Fighting COVID-19 is the most urgent priority; R&D commitments for vaccines and therapeutics noted. - Gates Foundation estimate: the cost of global distribution of vaccines has been estimated in the range of about $25 billion. - To reduce risk of future crises, spending should not crowd out R&D to fight other zoonotic infectious diseases, previously estimated at $4.5 billion annually. - National preparedness and spending: - Increasing preparedness by 10 index points (WHO index) would cost about 0.02 percent of GDP per year in medical products (imports such as respiration apparatus, X-ray equipment, protective glasses, hand sanitizer, surgical gloves). - Public investment in health care spending is higher by about 0.1 to 0.2 percent of GDP in countries that score 10 points higher on the WHO preparedness index. - Digital infrastructure needs: - Half of the 1.5 billion students affected by COVID-related school closures do not have access to a computer. - More than 40 percent of these students have no internet access at home (UNESCO 2020). - About 35 percent of the population in developing countries has access to the internet (versus about 80 percent in advanced economies). - Africa’s average broadband penetration was only 25 percent in 2018. - Sub-Saharan Africa household electrification averaged 44 percent of the population in 2017 (half of the world average). - Financing adaptation for low-income countries: - IMF staff assessment finds low-income countries need about $25 billion annually (1.1 percent of GDP) in public investment for adaptation. - Annual official aid to low-income developing countries was $10 billion in 2018 and would thus have to more than double to fulfill the needs. - Correlation between IMF estimates of needs and official aid for adaptation to climate change is about 56 percent (correlation in ratio to GDP is 0.57). ### Conditions and policy recommendations for scaling up public investment - Priority and sequencing: - First, priority should be given to maintenance spending and to existing projects. - Second, governments should identify a pipeline of projects that can be carefully appraised and ready for implementation within the next 24 months; a longer-horizon pipeline is needed for complex projects addressing structural transformations and resilience. - Third, procedures for selection and procurement of public investment projects should be strengthened immediately. - Complementary policies to strengthen multiplier effects and preserve productive capacity: - Provide liquidity to firms and an effective debt resolution system including a streamlined restructuring framework. - Target support to vulnerable but viable firms to preserve long-term productive capacity (October 2020 Global Financial Stability Report). - Public health measures to bring COVID-19 under control to allow safe reopening and easing of supply constraints. - Strengthen public investment management institutions and improve mechanisms for private debt resolution. - Reallocate spending, increase investment efficiency, and strengthen domestic revenue mobilization to make room for additional investments. - Applicability: - Macroeconomic case for public investment is strongest in advanced economies and several emerging market economies where multipliers are likely to be larger than in normal times and well above 1.0 if projects are of good quality. - In EMDEs and low-income countries facing tighter financing constraints the macro case is not as strong, but investments remain necessary to meet SDGs and build resilience; international support will be needed. ### Adaptation investment cost estimates and methodology (Box) - Types of adaptation investment considered: (1) upgrading investment projects, (2) retrofitting existing assets, (3) building new coastal protection infrastructure. Some other needs (drought preparation, temperature changes) are excluded here but noted as less expensive. - Unit-cost assumptions and results: - For new infrastructure projects subject to hazards, additional up-front cost to increase resilience standards is estimated to average about 15 percent of the typical initial cost. - Retrofitting assets is substantially more expensive and would incur costs greater than 50 percent of the asset value. - Retrofitting costs are spread equally over 10 years. - Coastal protection costs are based on high-definition coastal-zone representations and relevant climate models. - Global and group annual cost figures (Figure 2.1.1 context): - Annual upgrading, retrofitting, and protection investment costs shown with amounts including $229.5 billion, $494.4 billion, $24.6 billion, and $1.5 billion (presented in the figure as annual costs, percent of GDP by country group; upgrading and retrofitting unit-cost bases noted above). - Summary guidance: - High returns to adaptation imply that, over the medium term, an average annual investment of 1 percent of GDP globally would be beneficial. - Costs exceed some previous estimates because they encompass more investment types (coastal protection and retrofitting of exposed assets) and extend coverage to all countries. - Costs are estimated using a bottom-up approach using country shares of exposed assets derived from global hazard maps and road/rail asset data; upgrading and retrofitting costs use engineering techniques known to improve resilience. *Source: International Monetary Fund, Fiscal Monitor: Policies for the Recovery, October 2020 (Chapter 2).* ### 1. Country Level ### 1. Country Level ### Box 2.1 — Estimating Public Investment Needs for Climate Change Adaptation: Key findings - Disparities across countries in needed adaptation investment are vast. - Low-income countries and small states face greater challenges in meeting adaptation investment needs. - Coastal protection is most expensive for low-income countries and small states. - Low-income countries and emerging markets can encounter large upgrading costs because these countries typically have more investment projects. - Retrofitting costs are more evenly distributed across country income groups; even advanced economies face substantial expenses. ### Geographic distribution of adaptation costs - Asia and the Pacific, Africa, and the Caribbean face above-average costs because a large share of their existing and future infrastructure is exposed to climate hazards. - Across the globe, coastal protection represents a concentrated high-cost area, especially for low-income countries and small states. ### Cost composition and implications - Upgrading costs tend to be larger in low-income countries and emerging markets due to higher numbers of investment projects requiring climate-resilient design. - Retrofitting costs affect a broader set of countries, including advanced economies, producing a more even global distribution of retrofitting expenses. - The combination of higher exposure of infrastructure and differing project volumes implies varying policy and financing needs across country groups. *International Monetary Fund | October 2020* ### 2020. Well Spent: How Strong Infrastructure Governance Can ### 2020. Well Spent: How Strong Infrastructure Governance Can End Waste in Public Investment ### References and cited works - "2020. Well Spent: How Strong Infrastructure Governance Can End Waste in Public Investment. Washington, DC: International Monetary Fund." - Shenglin, B., F. Simonelli, Z. Ruidong, R. Bosc, and L. Wenwei. 2017. “Digital Infrastructure: Overcoming the Digital Divide in Emerging Economies.” G20 Insights 3. - Tandberg, E., and R. Allen. 2020. “Managing Public Investment Spending during the Crisis.” Special Series on COVID-19, Fiscal Affairs Department, International Monetary Fund, Washington, DC. - UNESCO. 2020. “Startling Disparities in Digital Learning Emerge as COVID-19 Spreads: UN Education Agency.” UN News, April 21. - UNEP. 2016. Adaptation Finance Gap Report 2016. Nairobi, Kenya. - Wang, H., I. Al-Saadi, P. Lu, and A. Jasim. 2020. “Quantifying Greenhouse Gas Emission of Asphalt Pavement Preservation at Construction and Use Stages Using Life Cycle Assessment.” International Journal of Sustainable Transportation 14 (1): 25–34. - Warner, A. 2014. “Public Investment as an Engine of Growth.” IMF Working Paper 14/148, International Monetary Fund, Washington, DC. - Wilson, D. J. 2012. “Fiscal Spending Jobs Multipliers: Evidence from the 2009 American Recovery and Reinvestment Act.” American Economic Journal: Economic Policy 4 (3): 251–82. - World Bank. 2013. World Development Report 2014: Risk and Opportunity Managing Risk for Development. Washington, DC. - Xiao, Y., D. D’Angelo, and N.-P. T. Lê. 2020. “Infrastructure Investment and Sustainable Development Goals.” In Well Spent: How Strong Infrastructure Governance Can End Waste in Public Investment, edited by G. Schwartz, M. Fouad, T. Hansen, and G. Verdier. Washington, DC: International Monetary Fund. ### Country abbreviations (selected examples) - AFG Afghanistan - AGO Angola - ALB Albania - ARE United Arab Emirates - ARG Argentina - AUS Australia - AUT Austria - AZE Azerbaijan - BDI Burundi - BEL Belgium - BEN Benin - BFA Burkina Faso - BGD Bangladesh - BGR Bulgaria - BHR Bahrain - BHS Bahamas, The - BIH Bosnia and Herzegovina - BLR Belarus - BLZ Belize - BOL Bolivia - BRA Brazil - BRB Barbados - BRN Brunei Darussalam - BTN Bhutan - BWA Botswana - CAF Central African Republic - CAN Canada - CHE Switzerland - CHL Chile - CHN China - CIV Côte d’Ivoire - CMR Cameroon - COD Congo, Democratic Republic of the - COG Congo, Republic of - COL Colombia - COM Comoros - CPV Cabo Verde - CRI Costa Rica - CYP Cyprus - CZE Czech Republic - DEU Germany - DJI Djibouti - DMA Dominica - DNK Denmark - DOM Dominican Republic - DZA Algeria - ECU Ecuador - EGY Egypt - ERI Eritrea - ESP Spain - EST Estonia - ETH Ethiopia - FIN Finland - FJI Fiji - FRA France - FSM Micronesia, Federated States of - GAB Gabon - GBR United Kingdom - GEO Georgia - GHA Ghana - GIN Guinea - GMB Gambia, The - GNB Guinea-Bissau - GNQ Equatorial Guinea - GRC Greece - GRD Grenada - GTM Guatemala - GUY Guyana - HKG Hong Kong Special Administrative Region - HND Honduras - HRV Croatia - HTI Haiti - HUN Hungary - IDN Indonesia - IND India - IRL Ireland - IRN Iran - IRQ Iraq - ISL Iceland - ISR Israel - ITA Italy - JAM Jamaica - JOR Jordan - JPN Japan - KAZ Kazakhstan - KEN Kenya - KGZ Kyrgyz Republic - KHM Cambodia - KIR Kiribati - KNA St. Kitts and Nevis - KOR Korea - KWT Kuwait - LAO Lao P.D.R. - LBN Lebanon - LBR Liberia - LBY Libya - LCA St. Lucia - LKA Sri Lanka - LSO Lesotho - LTU Lithuania - LUX Luxembourg - LVA Latvia - MAR Morocco - MDA Moldova - MDG Madagascar - MDV Maldives - MEX Mexico - MHL Marshall Islands - MKD North Macedonia - MLI Mali - MLT Malta - MMR Myanmar - MNE Montenegro - MNG Mongolia - MOZ Mozambique - MRT Mauritania - MUS Mauritius - MWI Malawi - MYS Malaysia - NAM Namibia - NER Niger - NGA Nigeria - NIC Nicaragua - NLD Netherlands, The - NOR Norway - NPL Nepal - NZL New Zealand - OMN Oman - PAK Pakistan - PAN Panama - PER Peru - PHL Philippines - PLW Palau - PNG Papua New Guinea - POL Poland - PRT Portugal - PRY Paraguay - QAT Qatar - ROU Romania - RUS Russian Federation - RWA Rwanda - SAU Saudi Arabia - SDN Sudan - SEN Senegal - SGP Singapore - SLB Solomon Islands - SLE Sierra Leone - SLV El Salvador - SMR San Marino - SOM Somalia - SRB Serbia - STP São Tomé and Príncipe - SUR Suriname - SVK Slovak Republic - SVN Slovenia - SWE Sweden - SWZ Eswatini - SYC Seychelles - SYR Syria - TCD Chad - TGO Togo - THA Thailand - TJK Tajikistan - TKM Turkmenistan - TLS Timor-Leste - TON Tonga - TTO Trinidad and Tobago - TUN Tunisia - TUR Turkey - TUV Tuvalu - TWN Taiwan Province of China - TZA Tanzania - UGA Uganda - UKR Ukraine - URY Uruguay - USA United States - UZB Uzbekistan - VCT St. Vincent and the Grenadines - VEN Venezuela - VNM Vietnam - VUT Vanuatu - WSM Samoa - YEM Yemen - ZAF South Africa - ZMB Zambia - ZWE Zimbabwe ### Glossary — key fiscal and policy definitions (selected) - Accelerated depreciation deductions: Tax measures that reduce the taxable income of a firm, by allowing for greater deductions for depreciation of an asset (e.g., machinery) in its earlier years of use. - Automatic stabilizers: Revenue and some expenditure items that adjust automatically to cyclical changes in the economy—for example, as output falls, revenue collections decline and unemployment benefits increase, which “automatically” provides demand support. - Balance sheet: Statement of the values of the stock positions of assets owned and liabilities owed by a unit, or group of units, drawn up in respect of a particular point in time. - Contingent liabilities: Obligations that are not explicitly recorded on government balance sheets and that arise only in the event of a particular discrete situation, such as a crisis. - Countercyclical fiscal policy: Active changes in expenditure and tax policies to smooth the economic cycle (by contrast with the operation of automatic stabilizers); for instance, by cutting taxes or raising expenditures during an economic downturn. - Coverage of public benefits: Share of individuals or households of a particular socioeconomic group who receive a public benefit. - Cyclically adjusted balance (CAB): Difference between the overall balance and the automatic stabilizers; equivalently, an estimate of the fiscal balance that would apply under current policies if output were equal to potential. - Cyclically adjusted primary balance (CAPB): Cyclically adjusted balance excluding net interest payments (interest expenditure minus interest revenue). - Equity injections by the public sector: Purchase of shares (ownership) of a firm by governments or public corporations, to provide it with the required capital to continue operations. - Fiscal buffer: Fiscal space created by saving budgetary resources and reducing public debt in good times. - Fiscal multiplier: Measures the short-term impact of discretionary fiscal policy on output. Usually defined as the ratio of a change in output to an exogenous change in the fiscal deficit with respect to their respective baselines. - General government: All government units and all nonmarket, nonprofit institutions that are controlled and mainly financed by government units comprising the central, state, and local governments; includes social security funds and does not include public corporations or quasi corporations. - Government guarantees: Government can provide coverage on the potential losses of the liabilities incurred by banks, firms, or households. They usually have no immediate upfront cost in the form of deficit or debt unless the expected cost is budgeted, but they create a contingent liability, with the government exposed to future calls on guarantees and fiscal risks. - Gross debt: All liabilities that require future payment of interest and/or principal by the debtor to the creditor. This includes debt liabilities in the form of special drawing rights, currency, and deposits; debt securities; loans; insurance, pension, and standardized guarantee programs; and other accounts payable. - In-kind benefits/transfers: Government social assistance provided in terms of specific goods (e.g., food) or services (e.g., healthcare) instead of cash. - Job retention schemes: Government programs that provide payments to employers to retain current employees, either part or full time. - Liquid assets: Assets that can be readily converted to cash. - Loss carry back rules: Tax measures that aim to provide liquidity to firms, by allowing for carrying current operating losses back to previous tax years to recover income taxes paid in these years. - Net debt: Gross debt minus financial assets corresponding to debt instruments. - Output gap: Deviation of actual from potential GDP, in percent of potential GDP. - Overall fiscal balance (also “headline” fiscal balance): Net lending and borrowing, defined as the difference between revenue and total expenditure, using the IMF’s 2001 Government Finance Statistics Manual (GFSM 2001). - Potential output: Estimate of the level of GDP that can be reached if the economy’s resources are fully employed. - Primary balance: Overall balance excluding net interest payments (interest expenditure minus interest revenue). - Progressive (or regressive) taxes: Taxes that feature an average tax rate that rises (or falls) with income. - Public sector: Includes all resident institutional units that are deemed to be controlled by the government. It includes general government and resident public corporations. - Quasi-fiscal activities: Non-commercial activities (such as subsidies or loans) undertaken by public corporations (such as state-owned enterprises or banks) on behalf of the government, outside their regular mandate. - Replacement rate (in job retention schemes): The rate at which a wage subsidy covers the lost wages of a worker due to reduced hours or pay. - Short-term/Short-time work schemes: Wage subsidies for temporary reductions in working time or pay of employees in firms affected by a temporary shock, to cover all or part of their lost wages. - Social insurance: Programs aimed at protecting households from shocks that can adversely impact their incomes and welfare; typically financed by contributions or payroll taxes. - Social protection: Comprise social insurance and social safety nets. - Social safety nets: Noncontributory transfer programs financed by general government revenue. - Structural primary balance: Extension of the cyclically adjusted primary balance that also corrects for other nonrecurrent effects that go beyond the cycle, such as one-off operations and other factors whose cyclical fluctuations do not coincide with the output cycle (for instance, asset and commodity prices and output composition effects). - Wage subsidies: Government payments to workers or their employers to incentivize employers to recruit or retain (often disadvantaged) workers. ### Methodological and statistical appendix — data, conventions, and country coverage - Appendix composition: - Four sections: “Data and Conventions”; “Fiscal Policy Assumptions”; “Definition and Coverage of Fiscal Data”; statistical tables on key fiscal variables. - Data in appendix tables compiled based on information available through September 29, 2020. - Data sources and basis: - Country-specific data and projections for key fiscal variables are based on the October 2020 World Economic Outlook database, unless indicated otherwise, and compiled by IMF staff. - Historical data and projections are based on information gathered by IMF country desk officers; updated continually as more information becomes available. - Structural breaks in data may be adjusted to produce smooth series through splicing and other techniques. - IMF staff estimates serve as proxies when complete information is unavailable. - Fiscal Monitor data may differ from official data in other sources, including the IMF’s International Financial Statistics and Government Financial Statistics. - Country classification and group composites: - World divided into: 35 advanced economies, 40 emerging market and middle-income economies, and 40 low-income developing countries. - Subgroup: seven largest advanced economies by GDP (Canada, France, Germany, Italy, Japan, United Kingdom, United States) = Group of Seven (G7). - Euro area members are distinguished as a subgroup; composite data for the euro area cover current members for all years. - Low-income developing countries defined by per capita income levels below $2,700 (as of 2016, World Bank Atlas method) and other structural features. - Emerging market and middle-income economies: those not classified as advanced or low-income developing. - Composite data for country groups are weighted averages of individual country data, weighted by annual nominal GDP converted to US dollars at average market exchange rates as a share of the group GDP. - For Fiscal Monitor reporting, the Group of 20 (G20) member aggregate refers to the 19 country members and does not include the European Union. - Fiscal data coverage conventions: - Most fiscal data refer to the general government for advanced economies; for emerging market and developing economies, data often refer to the central government or budgetary central government only. - All fiscal data refer to calendar years, except for Bangladesh, Egypt, Ethiopia, Haiti, Hong Kong SAR, India, Iran, Myanmar, Nepal, Pakistan, Singapore, and Thailand, for which they refer to the fiscal year. - For economies whose fiscal years end before June 30, data are recorded in the previous calendar year; for those ending on or after June 30, data are recorded in the current calendar year. - Statistical standards and manuals: - Majority of advanced economies and some large emerging market economies follow GFSM 2014 or national accounts methodology aligned with SNA 2008 or ESA 2010. - Most other countries follow GFSM 2001; some, including many low-income developing countries, use the 1986 GFSM. - Overall fiscal balance refers to net lending (+) and borrowing (−) of the general government; in some cases, overall balance refers to total revenue and grants minus total expenditure and net lending. - Debt data notes: - Fiscal gross and net debt data drawn from official data sources and IMF staff estimates; may deviate from formal GFSM definitions due to data limitations or country circumstances. - Differences in sectoral and instrument coverage mean debt data are not universally comparable; revisions can be substantial as more information becomes available. - Special country notes (selected): - Australia, Canada, Hong Kong SAR, United States: For cross-country comparability, gross and net debt levels reported by national statistical agencies for economies that have adopted the 2008 SNA are adjusted to exclude unfunded pension liabilities of government employees’ defined-benefit pension plans. - Bangladesh: Data are on a fiscal year basis. - Brazil: General government data refer to the nonfinancial public sector; gross public debt includes Treasury bills on the central bank’s balance sheet. According to the national definition, gross debt amounted to 75.8 percent of GDP at the end of 2019. - Chile: Cyclically adjusted balances refer to the structural balance, which includes adjustments for output and commodity price developments. - China: Public debt data include central government debt as reported by the Ministry of Finance, explicit local government debt, and shares—less than 25 percent, based on estimates from the National Audit Office estimate—of contingent liabilities the government may incur. IMF staff estimates exclude central government debt issued for the China Railway Corporation. - Colombia: Gross public debt refers to the combined public sector, including Ecopetrol and excluding Banco de la República’s outstanding external debt. - Dominican Republic: Public debt, debt service, and cyclically adjusted or structural balances are for the consolidated public sector; remaining fiscal series are for the central government. - Egypt, Ethiopia, Haiti, Hong Kong SAR, India, Myanmar, Nepal, Pakistan, Singapore, Spain: Specific notes include fiscal year reporting or adjustments for land revenue, investment income, financial sector support measures, and other country-specific accounting treatments. - Greece: General government gross debt includes short-term debt and loans of state-owned enterprises. - Ireland: General government balances between 2011 and 2012 reflect the impact of banking sector support; cyclically adjusted balances reported in Tables A3 and A4 exclude financial sector support measures. - Japan: Gross debt is on an unconsolidated basis. - Latvia: Fiscal deficit includes bank restructuring costs and thus is higher than the deficit in official statistics. - Mexico: General government refers to the central government, social security funds, public enterprises, development banks, the national insurance corporation, and the National Infrastructure Fund, but excludes subnational governments. - Norway: Cyclically adjusted balances correspond to the cyclically adjusted non-oil overall or primary balance and are in percent of non-oil potential GDP. - Peru: Cyclically adjusted balances include adjustments for commodity price developments. - Spain: Overall and primary balances include financial sector support measures estimated to be 0.3 percent of GDP for 2011, 3.7 percent of GDP for 2012. *International Monetary Fund | October 2020* ### 0.3 percent of GDP for 2013, 0.1 percent of GDP for ### text - 0.3 percent of GDP for 2013, 0.1 percent of GDP for ### Country-specific notes on fiscal balances and data - General comparative figures (periods and values as stated): - 0.3 percent of GDP for 2013 - 0.1 percent of GDP for 2014 - 0.1 percent of GDP for 2015 - 0.2 percent of GDP for 2016 - Sweden: - Cyclically adjusted balances take into account output and employment gaps. - Switzerland: - Data submissions at the cantonal and commune levels are received with a long and variable lag and are subject to sizable revisions. - Cyclically adjusted balances include adjustments for extraordinary operations related to the banking sector. - Thailand: - Data are on a fiscal year basis. - Turkey: - The fiscal projections assume a more negative primary and overall balance than envisaged in the authorities’ New Economic Program 2020–22 (October 2019), partly due to the deterioration in the growth outlook related to COVID-19, and partly due to definitional differences. - The basis for the projections in the World Economic Outlook and Fiscal Monitor is the IMF-defined fiscal balance, which excludes some revenue and expenditure items included in the authorities’ headline balance. - United States: - Cyclically adjusted balances exclude financial sector support estimated at 0.2 percent of potential GDP for 2011, 0.1 percent of potential GDP for 2012, and 0.0 percent of potential GDP for *Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2020/october/english/text.pdf* ### 2013. For cross-country comparability, expenditure ### text - 2013. For cross-country comparability, expenditure ### Data adjustments and country-specific notes - United States: expenditure and fiscal balances are adjusted to exclude the imputed interest on unfunded pension liabilities and the imputed compensation of employees (counted as expenditures under the 2008 SNA adopted by the United States, but not in economies that have not yet adopted the 2008 SNA). Data for the United States may thus differ from data published by the US Bureau of Economic Analysis (BEA). When translated into government financial statistics, data are compiled in accordance with the Government Finance Statistics Manual 2014. Because of data limitations, most series begin in 2001. - Gross and net debt levels reported by the BEA and national statistical agencies for other economies that have adopted the 2008 SNA (Australia, Canada, Hong Kong Special Administrative Region) are adjusted to exclude unfunded pension liabilities of government employees’ defined-benefit pension plans. - Uruguay: data are for the nonfinancial public sector (NFPS), coverage changed from the consolidated public sector to the NFPS with the October 2019 submission; central bank balances are not included in the fiscal data. - Venezuela: fiscal accounts include the budgetary central government; social security funds; FOGADE (insurance deposit institution); and a sample of public enterprises, including Petróleos de Venezuela, S.A. (PDVSA). Data for 2018–19 are IMF staff estimates; data for 2018–21 are IMF staff estimates and projections. The effects of hyperinflation and lack of reported data imply considerable uncertainty. ### Fiscal policy assumptions, historical alignment, and projection guidance - Historical data and projections of key fiscal aggregates are in line with those of the October 2020 World Economic Outlook, unless noted otherwise. - Short-term fiscal policy assumptions: based on officially announced budgets, adjusted for differences between national authorities and IMF staff regarding macroeconomic assumptions and projected fiscal outturns. - Medium-term fiscal projections: incorporate policy measures judged likely to be implemented. When IMF staff lack sufficient information, an unchanged structural primary balance is assumed, unless indicated otherwise. ### Selected country projection bases and special assumptions (excerpted) - Argentina: projections based on available information regarding budget outturn and budget plans for the federal and provincial governments, fiscal measures announced by the authorities, and IMF staff projections. - Australia: projections based on Australian Bureau of Statistics data, fiscal year 2019/20 mid-year reviews, the Economic and Fiscal Outlook in July 2020, and IMF staff estimates and projections. - Brazil: 2020 projections take into account the deficit target proposed in the budget guidance law and reflect policy announcements as of July 31, 2020; medium term assumes compliance with the constitutional spending ceiling. - Canada: projections use baseline forecasts in the federal Economic and Fiscal Update 2019, the Economic and Fiscal Snapshot 2020, latest provincial budgets, with IMF staff adjustments. - China: "A large fiscal expansion is estimated for 2020 based on budgeted and announced tax and expenditures measures to offset the health and economic repercussions of the COVID pandemic. For 2021, a mild expansion is projected given that the output gap is expected to remain relatively large." - Indonesia: fiscal projections are consistent with a gradual unwinding of the large fiscal stimulus in 2020, including returning the fiscal deficit to below 3 percent of GDP by 2023. - Mexico: 2020 projections informed by the approved budget but take into account the likely effects of the COVID-19 pandemic on fiscal outturns; 2021 onward assume compliance with rules established in the Fiscal Responsibility Law. - Singapore: for fiscal year 2020, projections are based on the budget (February 18, 2020) and subsequent supplementary budgets (March 26, April 6, April 21, and May 26). IMF staff assumes support packages in fiscal year 2020 are only for one year and that policies are unchanged for the remainder of the projection period. - Spain: 2020 projections include discretionary measures adopted in response to the COVID-19 crisis; projections from 2021 onward assume expiration of temporary COVID-19 measures and no further policy change; disbursement under the EU Recovery and Resilience Facility are reflected for 2021–24. - United Kingdom: projections based on the Budget Statement 2020 and revised OBR estimates; assume COVID-19 measures expire as announced but with some additional fiscal loosening over the next two years to support recovery and gradual consolidation thereafter with the goal of stabilizing public debt within five years. - United States: fiscal projections based on the January 2020 Congressional Budget Office baseline adjusted for IMF staff policy and macroeconomic assumptions; projections incorporate the effects of the Coronavirus Preparedness and Response Supplemental Appropriations Act; the Families First Coronavirus Response Act; and the Coronavirus Aid, Relief, Paycheck Protection Program and Health Care Enhancement Act. Projections are adjusted for IMF staff forecasts and different accounting treatments of financial sector support and of defined-benefit pension plans, converted to a general government basis. ### Definitions, coverage, and accounting practice conventions (summary) - Coverage notation used in tables: CG = central government; GG = general government; LG = local governments; SG = state governments; SS = social security funds; TG = territorial governments; NFPS = nonfinancial public sector; NFPC = nonfinancial public corporations; NMPC = nonmonetary financial public corporations; PS = public sector; BCG = budgetary central government; BC G and similar used where relevant. - Accounting standards: A = accrual; C = cash; Mixed = combination of accrual and cash accounting. - Debt valuation conventions explained: "Nominal" = valued at nominal values; "Face" = undiscounted principal to be repaid; "Current market" = market price valuation (insurance, pension, and standardized guarantee schemes valued per market-equivalent principles). - Many country tables and time series (examples in the appendix) present annual series for: Overall Fiscal Balance, Primary Balance, Cyclically Adjusted Balance, Cyclically Adjusted Primary Balance, Revenue, Expenditure, Gross Debt, Net Debt, and structural fiscal indicators (pension and health spending change projections, net present values, gross financing need, average term to maturity, debt to average maturity, projected interest rate–growth differential, pre-pandemic and projected overall balances, and nonresident holdings). ### Key methodological points and caveats - Fiscal projections and historical accounting may differ across countries because of differences in coverage (for example, NFPS vs consolidated public sector), accounting standards (2008 SNA adoption differences), and adjustments for unfunded pension liabilities. - Specific data revisions and coverage changes are highlighted for selected countries (for example, Netherlands historical revisions after adoption of ESA 2010; Uruguay coverage change in October 2019; Ecuador historical fiscal data revisions; Thailand excludes certain specialized financial institutions’ debt). - For countries with low data reliability or ongoing conflict (for example, Libya, Venezuela), the reliability of projections is explicitly noted as low, and large uncertainty is emphasized. *Source: IMF staff — Methodological and Statistical Appendix, Fiscal Monitor: Policies for the Recovery (October 2020).* ### Conclusion and Risk Assessment April 2012, Chapter 7 ### Conclusion and Risk Assessment April 2012, Chapter 7 ### Executive Board assessment of the global outlook and risks - Executive Directors broadly concurred with the assessment of the global economic outlook, risks, and policy priorities. - Noted stronger-than-expected economic activity in the second quarter, especially in advanced economies. - Agreed that the path to prepandemic activity will be long and precarious with persistent scarring effects on output and employment. - Projections assume that social distancing will continue into 2021 and then fade over time as therapies improve and vaccines become more broadly available. - Directors noted with concern that the pandemic is having dramatic effects on vulnerable people, leading to higher inequality, and a sharp increase in the number of people living in extreme poverty. - Uncertainty surrounding the baseline projections remains exceptionally large; recovery will be shaped primarily by: - the path of the pandemic, - the efficacy of containment measures, - pharmaceutical innovations. - More rapid development of new therapeutics and wide distribution of effective vaccines could accelerate the economic recovery; medical setbacks and new waves of infections could require new lockdowns. - Other important sources of uncertainty include: - the extent of global spillovers, - the damage to the supply potential, - the efficacy and duration of policy support, - potential shifts in financial market sentiment. - Prepandemic risks noted: trade and technology tensions, geopolitical challenges, and climate change. ### Policy priorities and recommendations - Effective and decisive policy support is needed to ensure stronger, more equitable, and resilient growth. - Key near-term priorities: - supporting the economic recovery, - protecting vulnerable people, - strengthening health care systems. - Support should ensure lifelines are not withdrawn prematurely as economies tentatively reopen. - Support should gradually shift from protecting jobs to helping displaced workers find new jobs through retraining and reskilling. - When the pandemic is under control, governments will need to address legacies of the crisis, including record deficits and public debt levels, elevated unemployment, and increased poverty. - Public investment should play a crucial role in supporting the postpandemic recovery; noted its sizable job creation potential. - Good governance, budget execution, and communication remain crucial to reap the full benefits of fiscal support and maintain public trust. - Governments will need to do more with less and prepare credible and equitable measures to reduce fiscal deficits and debts over the medium term. - Countries with limited fiscal space should protect public investment and support lower-income households that have been disproportionately hit by the pandemic. - Governments could consider increasing progressive taxation as well as reforms to modernize business taxation, including multilateral cooperation on the design of international corporate taxation to respond to the challenges of the digital economy. - LICs in particular face significant financing constraints; many countries will require external support, including debt relief, grants, and concessional financing. ### Financial stability and monetary policy - Bold policy actions by central banks to ease monetary policy, provide ample liquidity, and maintain the flow of credit have helped contain near-term risks to global financial stability. - Vulnerabilities are rising, most notably in the nonfinancial corporate sector as liquidity pressures may morph into insolvencies, especially for small and medium-sized enterprises. - The credit outlook will be shaped by the extent of continued policy support and the pace of the recovery, which is expected to be uneven across sectors and countries. - Rising defaults could lead to significant losses at banks and nonbank financial institutions. - While the global banking system is overall well capitalized, some banks and banking systems may experience aggregate capital shortfalls in the WEO adverse scenario. - Directors highlighted the importance of improving access of emerging markets and frontier economies to capital markets. - As economies reopen, accommodative policies and the continued flow of credit to borrowers will be essential to sustaining the recovery. - Once the pandemic is under control, policy support can be gradually withdrawn. - The postpandemic financial reform agenda should focus on: - strengthening the regulatory framework to address vulnerabilities in the nonbank financial sector exposed by the crisis, - stepping up prudential supervision to contain excessive risk taking in the lower-for-longer interest rate environment. ### International cooperation and IMF response - Directors underscored the importance of international cooperation in fighting the global health and economic crisis. - A key priority is to scale up production capacity and develop distribution channels to ensure that all countries have access to an effective, affordable, and safe vaccine. - Several emerging market and developing countries require international assistance through debt relief, grants, and concessional financing. - The IMF has rapidly scaled up its lending facilities since the onset of the pandemic, providing swift financial assistance to more than 80 countries. - Directors discussed opportunities for multilateral cooperation to alleviate trade and technology tensions and to collectively implement climate change mitigation policies. ### IMF Special Series on COVID-19: selected notes and trackers - The Special Notes Series (IMF.org/COVID19notes) features the latest analysis and research from IMF staff in response to the pandemic. - Selected notes summarized: - "Digital Solutions for Direct Cash Transfers in Emergencies" — digital solutions help identify and validate intended beneficiaries, make payments in a timely and secure manner, and ensure transparency and accountability by providing a reliable audit trail and publishing timely data. - "Managing the Impacts of the Coronavirus: Guidance on Health Spending Policies" — immediate response should increase spending for mitigation and medical treatment; costs depend on country-specific factors. - "Challenges in Forecasting Tax Revenue" — forecasting tax revenue during the pandemic is challenging; standard buoyancy approaches likely overestimate revenues; a disaggregated approach improves forecasts. - "Keeping the Receipts: Transparency, Accountability, and Legitimacy in Emergency Responses" — strong fiscal transparency, public accountability and institutional legitimacy are required when governments “do what it takes.” - COVID-19 Policy Tracker: periodically updated policy tracker summarizes key economic responses 196 governments are taking to limit the human and economic impact of the pandemic. *Italic: Conclusion and Risk Assessment April 2012, Chapter 7 — content unit extracted from the supplied IMF text (October 2020 excerpts).* ### CHAPTER 1 ### CHAPTER 1 Fiscal Policies to Address the COVID-19 Pandemic ### Chapter title - CHAPTER 1: Fiscal Policies to Address the COVID-19 Pandemic ### Adjacent chapter heading appearing in the source - CHAPTER 2: Public Investment for the Recovery *Source: text - CHAPTER 1* --- _Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2020/october/english/text.pdf_