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### Overview
- The COVID-19 pandemic "has not yet been brought under control, and recovery is not assured."
- Divergent recoveries reflect differences in access to vaccines, pace of vaccination, effectiveness of other measures, and scale and modalities of policy support, with "China and the United States recovering the fastest."
- Continued and flexible fiscal support is "crucial until a durable recovery is under way."
- Governments face legacy challenges: "debt vulnerabilities, rising fiscal risks, and the disproportionate burden on poor and vulnerable households that exacerbates preexisting inequities."

### Scale and composition of fiscal support
- Total multiyear fiscal actions since the beginning of the pandemic: "$16 trillion globally since the beginning of the pandemic, with a data cutoff as of March 17, 2021."
- Composition:
  - "$10 trillion consists of additional spending and forgone revenue."
  - "$6 trillion consists of government loans, guarantees, and capital injections."
- Liquidity support to nonfinancial firms has increased private sector indebtedness; "If bankruptcies increase, some private debt could migrate to the public sector through bailouts."

### Recent fiscal outcomes and projections
- Average overall fiscal deficits (share of GDP) in 2020:
  - "11.7 percent for advanced economies"
  - "9.8 percent for emerging market economies"
  - "5.5 percent for low-income developing countries"
- "Global public debt climbed to 97.3 percent of GDP in 2020, a surge of 13 percentage points from the level projected before the pandemic."
- Fiscal deficits in 2021 are expected to shrink as pandemic-related support expires or winds down and automatic stabilizers play out.
- Global public debt is projected to "stabilize at about 99 percent of GDP through 2021 and in the medium term."

### Drivers of the rise in public debt
- The rise in public debt ratios during 2020–21 was driven largely by output drops rather than policy measures alone.
- Using an extended accounting method, the overall effect of negative output growth on the debt-to-GDP ratio in 2020 amounted to:
  - "9.8 percentage points for advanced economies"
  - "5.5 percentage points for emerging market economies"
  - "3.1 percentage points for low-income developing countries"
- Other contributors: the interest bill, policy measures, and the stock-flow residual (e.g., bailouts or exchange rate changes).

### Fiscal developments by income group

- Advanced Economies
  - Large multiyear support beginning early 2020; emergency lifelines extended and new measures announced.
  - Average cyclically adjusted primary deficit "jumped to 7.6 percent of GDP in 2020."
  - Country-specific above-the-budget-line support in 2020:
    - "United States provided assistance equivalent to 16.7 percent of GDP in 2020"
    - "Japan ... 15.9 percent"
    - "United Kingdom ... 13 percent"
  - Euro area: national fiscal policies totaled "more than 5 percent of the region’s GDP" plus automatic stabilizers "amounting to about 5 percent of GDP."
  - Average government gross debt-to-GDP ratio of advanced economies "soared to 120 percent in 2020."
  - Medium-term projections and notes:
    - Average cyclically adjusted primary deficit projected to fall from 7.6 percent of GDP in 2020 to 2.3 percent in 2026.
    - Average public debt for advanced economies projected to stand at 121 percent of GDP by 2026, "17 percentage points higher than the pre–COVID-19 levels."
    - Several countries projected to have rising public debt in the medium term (Korea, United States).
    - Euro area average public debt projected to gradually decline to 92 percent of GDP in 2026.
    - Policy priorities cited (examples): Germany—medium-term plan promoting greener, smarter, more inclusive growth; Japan—need to reanchor medium-term fiscal policy.

- Emerging Market and Developing Economies
  - Nearly all eased fiscal policy in 2020; average overall fiscal deficit more than doubled relative to 2019 to reach "9.8 percent of GDP."
  - Average government debt ratios rose to "64.4 percent of GDP at the end of 2020," a "10 percentage points" rise from the previous year.
  - 2021 and medium term:
    - Average overall deficit projected to narrow in 2021 to "7.7 percent of GDP" under the April 2021 WEO baseline.
    - Average overall deficit projected to shrink from "9.8 percent of GDP in 2020 to 4.9 percent in 2026."
    - Fiscal adjustments envisaged through spending restraint ("3.3 percentage points of GDP on a cumulative basis") and moderate revenue mobilization.
    - With moderate fiscal adjustments, average government debt-to-GDP ratio projected to rise further in 2021 and remain on an upward trajectory to exceed "73 percent of GDP by 2026 (largely driven by China)."
  - Country-specific projections:
    - China: general government debt expected to reach "69.6 percent of GDP in 2021."
    - South Africa: pandemic-related increase in debt estimated to continue, reaching "95 percent of GDP by 2026."
    - Brazil: projected to stabilize at "98.4 percent of GDP in 2021."
    - India: projected to stabilize at "86.6 percent of GDP in 2021."
  - Policy actions: varied country-level packages and planned consolidation measures (examples: China, India, Brazil, Saudi Arabia, Russia, Indonesia, South Africa).
  - Recommendation: credible medium-term fiscal frameworks anchored on revised fiscal objectives and revenue mobilization to enhance confidence and reduce vulnerabilities.

- Low-Income Developing Countries
  - 2020 outcomes:
    - Average overall fiscal deficit increased by "1.5 percentage points of GDP to reach 5.5 percent of GDP."
    - Average public debt increased by "5 percentage points to reach 49.5 percent of GDP at the end of 2020."
    - Total spending remained essentially constant; "60 percent of countries in the group cut capital expenditures as a ratio of GDP relative to pre-COVID-19 projections."
  - 2021 and medium term:
    - Average fiscal deficit projected to decline to "4.9 percent of GDP" in 2021.
    - Average fiscal deficit projected to return to its prepandemic level by 2026, aided by revenue increases (examples: Republic of Congo, Haiti, Lao P.D.R.).
    - Some high-debt countries expected to restrain spending to secure debt sustainability (Republic of Congo, Mozambique, Zambia).
  - Debt vulnerabilities and financing:
    - Near-term debt vulnerabilities remain high due to limited market access and restricted ability to increase revenues.
    - Average debt levels projected to peak in 2021 while continuing to climb in some countries.
    - Elevated debt service relative to tax revenues exceeding "20 percent in Ghana, Kenya, Nigeria, and Zambia."
    - Debt distress risks present in several countries.
  - International support in 2020:
    - Grants, concessional loans, and debt relief provided; beneficiaries included 38 countries (out of 70) assessed to be at high risk of or in debt distress per IMF–World Bank DSAs.
    - As of end-December 2020, "45 countries (or more than 60 percent of eligible countries) had requested to join or extend the Debt Service Suspension Initiative," benefiting from the suspension of "$5 billion total debt service (or an average of 0.6 percent of countries’ public debt) as reported by the Group of Twenty (G20) economies for May through December 2020."
  - Policy implication: without renewed domestic and international efforts, achieving the SDGs by 2030 would be extremely difficult.

### Fiscal policy posture and central bank actions
- Central banks in advanced economies and some emerging market economies lowered policy rates and purchased government bonds, facilitating fiscal responses.
- Despite accommodative monetary policy, borrowing constraints persisted in many emerging market and developing economies.

### Policy guidance and priorities
- Near-term:
  - Continue fiscal support "as feasible and as needed while vaccinations continue, testing capacity and other preventive measures are enhanced, and the recovery strengthens."
  - Tailor support "increasingly ... to country circumstances and changing economic and pandemic conditions."
  - Maintain support flexibly while refining design and eligibility; emergency lifelines should be withdrawn gradually where local transmission has been persistently low and activity has normalized.
  - If pandemic and economic indicators worsen, pause or reverse withdrawal; extend measures with contingent spending plans (supplementary budgets or COVID-19 contingency funds).
  - Ensure transparency in usage and careful management of fiscal risks from contingent liabilities.
- Medium-term:
  - Develop credible medium-term fiscal frameworks—"thereby extending the horizon for fiscal policymaking beyond the annual budget."
  - Fiscal policy should enable a "green, digital, and inclusive transformation of the economy in the post-COVID-19 environment."
    - Cited example: "efficient use of the Next Generation EU resources can facilitate such transformation in the European Union."
  - Once recovery is firmly in place, prioritize tackling long-standing weaknesses: "tax and social protection reforms" and renewed efforts to achieve the "Sustainable Development Goals (SDGs)."

### Risks to the fiscal outlook
- Upside:
  - Faster-than-expected vaccinations, especially in emerging market and developing economies, could end the pandemic sooner, boosting revenues and allowing earlier unwinding of temporary lifelines.
- Downside risks (as listed in the source):
  - Protracted economic downturn:
    - Implementation lags or renewed lockdowns could weaken growth.
    - Delays in vaccine deployment and lower efficacy against variants could increase long-term scarring.
    - April 2021 WEO adverse scenario: high and rising infections could restrict mobility and activity, leading to "0.5–1 percentage point lower growth in 2021–22 than the baseline" and larger fiscal deficits and debt.
    - Premature scaling back of policy support could cause employment and income losses, exacerbating poverty and inequality.
  - Abrupt tightening of financing conditions:
    - Higher and rising debt increases exposure to abrupt changes in financing conditions; an abrupt surge in yields could worsen financing constraints for emerging market and developing economies.
  - Materialization of contingent liabilities:
    - Nearly "40 percent of global fiscal support constitutes liquidity support measures (loans, guarantees, equity injections, quasi-fiscal operations)."
    - Calls on guarantees or widening losses in state-owned enterprises could materialize contingent liabilities, weakening government balance sheets.
    - Surges in bankruptcies could strain public balance sheets through corporate-bank-sovereign links.
  - Volatility in commodity prices:
    - Renewed weakness could worsen revenue outlooks for commodity exporters.
  - Rising social discontent:
    - Pandemic impacts or inadequate policy responses (including unequal vaccine access) could heighten deaths or socioeconomic hardship, weakening trust and policy effectiveness and putting public finances at risk.

### Effectiveness of discretionary fiscal policy responses
- Aggregate size and composition (through March 17, 2021):
  - Total global pandemic-related fiscal actions: "$16 trillion."
  - Composition:
    - "$10 trillion consists of additional spending and forgone revenue."
    - "$6 trillion consists of government loans, guarantees, and capital injections."
- Patterns:
  - Among G20 advanced economies, half of above-the-line support devoted to employment protection and household income support.
  - Among emerging market economies, public works and employment protection received the most support.
  - In G20 advanced economies, support to large firms dominated by guarantees and quasi-fiscal activities.
  - Fiscal support in emerging market economies was frontloaded.
  - Many support measures are expiring in several countries (e.g., Brazil, China); in only a few cases are they being replaced or substantially extended (France, Japan, Spain, United States).
- Estimated macroeconomic impact:
  - Empirical analysis estimates government spending and revenue actions mitigated the fall in global growth in 2020 by "2 percentage points."

### Macroeconomic and labor market effects
- Excludes loans, guarantees, and equity injections from macro analysis due to quantification difficulties.
- Countries with larger spending and revenue actions (mostly advanced economies) experienced smaller output contractions; growth effects especially large in Canada, Germany, and the United States.
- Timing and composition effects:
  - Consumption- and income-support measures generated earlier effects.
  - Public investment (e.g., China) produced effects with longer lags but longer duration.
- Labor market:
  - Wage subsidies and job-retention programs reduced separations and preserved job matches but may hamper reallocation if overextended.
  - Job-retention programs associated with reductions in working hours rather than mass layoffs.
  - Risks: wage subsidies may postpone layoffs; prolonged reliance on unemployment benefits could lead to structural unemployment if skills erode.
  - Policy implication: shift support toward reallocation measures during recovery (see Chapter 3 of the April 2021 WEO).

### Social safety nets
- Additional social protection spending in response to COVID-19: "0.6 percent of GDP on average during the first three quarters of 2020."
- Increased social protection spending mitigated the rise of global extreme poverty by "about 10 million people (October 2020 Fiscal Monitor)."
- Regional patterns:
  - Middle East and North African countries: highest rise in coverage but lowest increases in adequacy of benefits—reflecting untargeted support.
  - Latin American and Caribbean countries: doubled adequacy levels while keeping relatively high coverage.
- Recommended durable reforms: reduce leakages to high-income groups, address program fragmentation, expand coverage, improve targeting (means testing, proxy means testing), and use instruments effective for informal sector delivery (government-to-person payments, mobile money, in-kind transfers, beneficiary database matching, community-based identification).

### Support to nonfinancial firms and liquidity programs
- Various liquidity programs covered one-quarter of surveyed nonfinancial firms; larger firms more likely to receive public support.
- Targeting issues:
  - One-fifth of nonfinancial firms that received government support did not experience a large direct adverse effect on operations.
  - Low take-up of loan guarantees in some cases due to low demand, administrative constraints, or conditionality (examples: Germany, United States).
- Policy guidance:
  - Public support should be limited to circumstances with a clear market failure (high uncertainty deterring private flows; social cost of bankruptcies not internalized; inadequate private/public insolvency resolution mechanisms).
  - Roll back blanket loans and guarantees when appropriate.
  - Consider (quasi) equity injections such as junior "profit participation" loans if fiscal space and implementation capacity exist.
  - Partner with private sector to assess firm viability; gradually reduce loan guarantees and link to restrictions (dividends, share buybacks); consider conversion of guaranteed debt into equity for viable firms with strong economic/social rationale.
- Schematic policy considerations for firms include targeted temporary tax/social deferrals or subsidies, partial guarantees, direct loans with restrictions, temporary suspension of insolvency rules, standardized partial guarantee programs for SMEs, micro-lending for microenterprises, and restructuring options (out-of-court, hybrid restructurings, making debt forgiveness nontaxable).

### Fiscal needs, constraints, and external assistance
- Budget needs to remain sizable, including for vaccinations, targeted lifelines, and broad-based demand support (depending on fiscal space and macro conditions).
- Highly indebted emerging market and developing economies face tight financing constraints and limited capacity for social protection and domestic revenue mobilization.
- Fragile states or countries at risk of debt distress have even more limited near-term support scope.
- Several countries require international assistance: grants, concessional and emergency loans, and in some cases debt restructuring of commercial and official debt.
- Need for quick implementation of the G20 Common Framework for Debt Treatments and widening its country coverage of eligible debtors.

### Medium-term frameworks, tax policy, and public investment
- Trade-off between near-term support and strengthening fiscal positions can be eased by credible medium-term fiscal frameworks attuned to economic developments.
- Early development and announcement of medium-term strategies can create near-term fiscal space and anchor sustainability.
- Use of escape clauses or temporary suspension of fiscal rules provided flexibility; countries should communicate pathways for reinstating rules and recalibrate rule design where needed.
- Revenue mobilization recommendations (particularly for low-income countries):
  - Implement well-designed value-added taxes with timely refunds.
  - Build capacity for property taxation.
  - Gradually expand base for corporate and personal income taxes, eliminate costly exemptions.
  - Efficiently tax extractive industries.
  - Adopt comprehensive risk-based strategies focusing on large taxpayers to improve compliance.
- Quality and timing of public investment matter:
  - Early, high-quality public investment in countries with fiscal space maximizes growth effects.
  - Delaying high-return public investment reduces its expansionary impact and raises medium-term adjustment needs.
  - Pandemic-related investments in health care and vaccination should be maintained as a priority.

### Fiscal package simulations and key insights
- Benchmark package (from simulations calibrated to 2020 contraction):
  - Targeted transfers to low-income households: "2 percent and 1.5 percent of GDP for years one and two, respectively."
  - Public investment: "0.5 percent of GDP for the first two years and declining gradually."
  - Delayed increase in labor income tax rates for high-income households by "0.5 percentage points at the peak."
- Two key insights:
  - Timing is critical: greater short-term fiscal support beneficial when interest rates are low and slack is high; strengthen fiscal positions once recovery is underway.
  - Composition matters: reliance on high-multiplier expenditure measures and progressive personal income taxation can raise growth and mitigate income inequality while containing increases in public debt over time.
- Multipliers and outcomes:
  - Two-year cumulative output multiplier: "slightly more than 1" given low-interest-rate environment and accommodative monetary stance.
  - Long-term multiplier could be close to "2," assuming persistent increase in productive public investment.
  - Transfers boost income and consumption for low-income households; increased taxes borne by high-income households over the medium term.

### Recovery priorities: green, digital, and inclusive transformation
- As vaccinations advance and economies recover, fiscal policy should enable a green, digital, and inclusive transformation while managing fiscal and financing risks.
- Priority areas:
  1. Investing for the future and improving health care and education outcomes.
  2. Facilitating reallocation of labor and capital.
  3. Improving coverage and adequacy of social protections cost-effectively to counter inequality and poverty (Chapter 2).
  4. Reforming tax systems, including at the international level.
  5. Reducing debt vulnerabilities and enhancing debt transparency.
- Investment projects should mitigate climate change and facilitate digitalization, with private sector participation where possible and partial financing from higher carbon taxes.
- In low-income countries, green investment can be facilitated through official support combined with domestic and international private finance and improved public investment management.
- Strengthen social safety nets and reform tax systems to support inclusive growth (improve progressivity, reform international tax rules, broaden tax bases, more neutral capital taxation, better VAT design, greater use of carbon/property/inheritance taxes, digital enhancements, institutional strengthening).

### Tracking, transparency, and auditing of COVID-19 spending
- Many countries committed to track and transparently report emergency COVID-19 spending.
- Innovative practices across three areas: tracking COVID-19 spending; ensuring transparency of COVID-19 responses (including procurement contracts); auditing COVID-19 spending.
- Tracking practices:
  - Some countries implemented measures through normal budget channels while adapting budget nomenclature, programs, and FMIS (examples: Burkina Faso, France).
  - More than 40 countries established dedicated COVID-19 funds to centralize emergency responses and keep an audit trail; safeguards include strong legal backing, a clear "sunset clause," well-defined PFM processes, and robust accounting and reporting standards (example: Sierra Leone).
- Transparency practices:
  - COVID-19 information included in regular budget execution reports (example: Austria); some countries produce dedicated reports (example: Maldives).
  - Dedicated transparency portals (examples: Colombia, France, Honduras, Peru) provide comprehensive, promptly updated pictures of support expenditure; good practices include overview of the response including off-budget measures, cross-sectional spending information (example: Brazil), and open access to microdata (examples: Paraguay, United States).
  - Some countries publish procurement contract information including beneficial ownership (examples: Jordan, Papua New Guinea).
  - Some countries amended procurement legal frameworks to require collection of beneficial ownership information (examples: Ecuador, Kenya, Kyrgyz Republic, Nicaragua).
- Scrutiny and auditing:
  - Supreme audit institutions conducted interim audits (Honduras, Peru, Sierra Leone, South Africa); outcomes in South Africa included recovery of "R3.4 billion (US$220 million)" of incorrect payments and a high-level task force to address allegations of corruption.
  - European Court of Auditors published a first review of the EU’s emergency response until mid-2020 and announced that one-quarter of its audits in 2021 would focus on the European pandemic response.
  - Civil society and media complemented transparency efforts (examples: South Africa’s "Keep the Receipts"; Red PALTA tracing procurement irregularities in seven Latin American countries).

### Flexibility of fiscal rules during the pandemic
- Many countries used built-in adjustments or escape clauses in fiscal rules in 2020; activations often followed predefined processes involving governments, parliaments, and fiscal councils.
- Types of provisions used include supranational escape clauses (Central African Economic and Monetary Community, Eastern Caribbean Currency Union, European Union) and national escape clauses (Armenia, Austria, Azerbaijan, Brazil, Costa Rica, Croatia, Estonia, Grenada, Honduras) and suspensions or changes in fiscal rules (Colombia, Ghana, Poland, Russian Federation; Paraguay and Peru suspended rules until end-2021; Indonesia suspended a 3 percent of GDP balance budget target for three years).
- Transition back to rules:
  - Example: Canada plans gradual unwinding of support using data-driven triggers (employment or total hours worked).
  - Brazil withdrew most COVID-related support at end-2020 and aimed to meet the expenditure ceiling in 2021; a constitutional amendment exempted a round of cash transfers limited to "0.6 percent of GDP."
  - Preserving credibility requires that flexibility be temporary and transparent, including communicating return-to-rule processes and announcing realistic medium-term paths.

### International corporate taxation: two-pillar Blueprints
- G20/OECD Inclusive Framework Blueprints (October 2020) on two pillars:
  - Pillar One:
    - Assigns some taxing rights to market countries via a formula based on share of sales to reallocate a share of "residual" profits for large multinationals in certain sectors (automated digital services and consumer-facing businesses).
    - OECD (2020) estimates Pillar One would increase global corporate tax revenues by "¼ to ½ percent."
    - Concerns: lack of coherent economic rationale, high complexity, several unresolved substantive issues.
  - Pillar Two:
    - Ensures profits of large multinationals are subject to at least some minimum level of taxation via an "income inclusion rule" and two "inbound" rules (principal "undertaxed payment rule" and "subject to tax rule").
    - OECD estimates Pillar Two would raise global corporate tax revenues by "between 1¾ and 2¾ percent."
    - Concern: proposal likely to benefit advanced economies more than developing countries because of proposed effective priority of the outbound rule over the principal inbound rule.
- Political and implementation considerations:
  - Key features to agree by mid-2021 include the rule order in Pillar Two, the scope of Pillar One, and the level of the minimum effective tax rate (range between "9 percent and 12½ percent" discussed).
  - Agreement important to avoid tax competition and proliferation of unilateral measures; even with agreement, pressures for further reforms likely to continue.

_International Monetary Fund | April 2021 — Chapter 1, "Introduction" (Fiscal Monitor: A Fair Shot)_

### Introduction

### ch1 - Introduction

### Overview
- The COVID-19 pandemic "has not yet been brought under control, and recovery is not assured."
- Access to vaccines, pace of vaccination, effectiveness of other measures, and scale and modalities of policy support differ widely across countries, producing divergent recoveries with "China and the United States recovering the fastest" while many economies lag.
- Continued and flexible fiscal support is "crucial until a durable recovery is under way."
- Governments are managing legacies of the crisis including "debt vulnerabilities, rising fiscal risks, and the disproportionate burden on poor and vulnerable households that exacerbates preexisting inequities."

### Scale and composition of fiscal support
- Many governments are implementing multiyear fiscal actions totaling "$16 trillion globally since the beginning of the pandemic, with a data cutoff as of March 17, 2021."
- Fiscal support varies across economies depending on the effect of pandemic-related shocks, ability to access low-cost borrowing, and precrisis fiscal conditions.
- Massive liquidity support to nonfinancial firms has increased private sector indebtedness; "If bankruptcies increase, some private debt could migrate to the public sector through bailouts."

### Recent fiscal outcomes and projections
- Average overall fiscal deficits (share of GDP) in 2020:
  - "11.7 percent for advanced economies"
  - "9.8 percent for emerging market economies"
  - "5.5 percent for low-income developing countries"
- "Global public debt climbed to 97.3 percent of GDP in 2020, a surge of 13 percentage points from the level projected before the pandemic."
- Fiscal deficits in 2021 are expected to shrink as pandemic-related support expires or winds down and automatic stabilizers play out.
- Global public debt is projected to "stabilize at about 99 percent of GDP through 2021 and in the medium term."

### Drivers of the rise in public debt
- The rise in public debt ratios during 2020–21 was driven largely by output drops rather than policy measures alone.
- Using an extended accounting method, the overall effect of negative output growth on the debt-to-GDP ratio in 2020 amounted to:
  - "9.8 percentage points for advanced economies"
  - "5.5 percentage points for emerging market economies"
  - "3.1 percentage points for low-income developing countries"
- Other contributors include the interest bill, policy measures, and the stock-flow residual (factors such as bailouts or exchange rate changes).

### Fiscal developments by income group

- Advanced Economies
  - Undertook sizable fiscal support beginning early 2020; emergency lifelines extended and new measures announced.
  - The average cyclically adjusted primary deficit "jumped to 7.6 percent of GDP in 2020."
  - Country-specific above-the-budget-line support in 2020:
    - "United States provided assistance equivalent to 16.7 percent of GDP in 2020"
    - "Japan ... 15.9 percent"
    - "United Kingdom ... 13 percent"
  - National fiscal policies in the euro area totaled "more than 5 percent of the region’s GDP" plus automatic stabilizers "amounting to about 5 percent of GDP."
  - With severe contraction and massive support, average government gross debt-to-GDP ratio of advanced economies "soared to 120 percent in 2020."
  - 2021 outlook: average fiscal deficit expected to narrow as support winds down, though several measures have been extended into 2021 and beyond (examples: Canada, United Kingdom, Japan).

- Emerging Market and Developing Economies
  - On average, the rise in deficits has stemmed primarily from the collapse in revenues caused by lower economic activity.
  - Many emerging market and developing economies have faced borrowing constraints, particularly those with elevated debt, large gross financing needs, and a high share of external or foreign-currency-denominated debt.
  - For commodity exporters, depressed prices and supply cuts have added to the challenge.

- Low-Income Developing Countries
  - Experienced increases in deficits driven by output collapses and revenue shortfalls; face varying levels of fiscal space and risk of debt distress.

### Fiscal policy posture and central bank actions
- Central banks in advanced economies and some emerging market economies have lowered policy rates and purchased government bonds, facilitating fiscal responses.
- Despite accommodative monetary policy, borrowing constraints persisted in many emerging market and developing economies.

### Policy guidance and priorities
- Continue fiscal support "as feasible and as needed while vaccinations continue, testing capacity and other preventive measures are enhanced, and the recovery strengthens."
- Support should "increasingly be tailored to country circumstances and changing economic and pandemic conditions."
- To balance risks from growing debt with risks from premature withdrawal of support, policymakers need to "develop credible medium-term fiscal frameworks—thereby extending the horizon for fiscal policymaking beyond the annual budget."
- Fiscal policy should enable a "green, digital, and inclusive transformation of the economy in the post-COVID-19 environment."
  - Example cited: "efficient use of the Next Generation EU resources can facilitate such transformation in the European Union."
- Once recovery is firmly in place, priorities include tackling long-standing weaknesses in public finances such as "tax and social protection reforms" and renewed efforts to achieve the "Sustainable Development Goals (SDGs)."

### Structure of the chapter
- The remainder of Chapter 1:
  - Reviews recent fiscal developments and outlook by country income group, considering risks to public finances;
  - Examines the effectiveness of discretionary fiscal policy responses to the COVID-19 crisis;
  - Discusses near-term and longer-term policy priorities.

_International Monetary Fund | April 2021 — Chapter 1, "Introduction" (Fiscal Monitor: A Fair Shot)_

### 1. Advanced Economies2. Emerging Market Economies3. Low-Income Developing Countries

### ch1 - 1. Advanced Economies2. Emerging Market Economies3. Low-Income Developing Countries

### Advanced Economies — Medium-term fiscal trajectories and debt
- Fiscal deficits are projected to shrink in most advanced economies as recoveries accelerate and gradual fiscal adjustments resume.
- The average cyclically adjusted primary deficit is projected to fall from 7.6 percent of GDP in 2020 to 2.3 percent in 2026.
- The average public debt for this group is projected to stand at 121 percent of GDP by 2026, 17 percentage points higher than the pre–COVID-19 levels.
- Several countries are projected to have rising public debt in the medium term (Korea, United States).
- The euro area average public debt is projected to gradually decline to 92 percent of GDP in 2026.
- Policy notes and priorities mentioned:
  - Germany: medium-term budget plan guided by promoting greener, smarter, and more inclusive growth.
  - Japan: need to reanchor medium-term fiscal policy to ensure debt remains sustainable given large COVID-19 and age-related budget pressures.
  - Some countries with larger cyclically adjusted primary deficits compared with pre–COVID-19 levels: Belgium, Denmark, Italy, Korea, The Netherlands, Spain (with some benefiting from spending and/or revenue reforms: Belgium, France, Italy).

### Emerging Market Economies — Heterogeneous responses and outlook
- In 2020:
  - Nearly all emerging market economies eased fiscal policy.
  - The average overall fiscal deficit more than doubled relative to 2019 to reach 9.8 percent of GDP.
  - Average government debt ratios rose to 64.4 percent of GDP at the end of 2020, a 10 percentage points rise from the previous year.
- In 2021 and medium term:
  - The average overall deficit is set to narrow in 2021 to 7.7 percent of GDP under the April 2021 WEO baseline.
  - The average overall deficit is projected to shrink from 9.8 percent of GDP in 2020 to 4.9 percent in 2026.
  - Fiscal adjustments envisaged through spending restraint (3.3 percentage points of GDP on a cumulative basis) and moderate revenue mobilization.
  - With moderate fiscal adjustments, the average government debt-to-GDP ratio is projected to rise further in 2021 and remain on an upward trajectory to exceed 73 percent of GDP by 2026 (largely driven by China).
- Country-specific numbers and projections:
  - General government debt in China is expected to reach 69.6 percent of GDP in 2021.
  - South Africa: pandemic-related increase in debt is estimated to continue, reaching 95 percent of GDP by 2026.
  - Brazil: projected to stabilize at 98.4 percent of GDP in 2021.
  - India: projected to stabilize at 86.6 percent of GDP in 2021.
- Policy actions and varieties:
  - China: shifted to broader demand support over time; projected to tighten off-budget investment.
  - India: announced November 2020 package; 2021/22 budget focuses on health care, education, and public infrastructure and predicts continued accommodative fiscal stance.
  - Brazil: expanded social safety net and job-retention program; expiry of “war budget” implies sizable tightening of primary expenditures.
  - Saudi Arabia: widened fiscal deficit in 2020; planned significant central government fiscal consolidation in 2021.
  - Russia: foresees reducing non-oil deficits by unwinding pandemic measures and returning to the fiscal rule in 2022.
  - Indonesia: 2021 budget envisages moderate expansionary stance; plans adjustments of 1.5 percent of GDP annually during 2022–23 to return to the deficit ceiling.
  - South Africa: fiscal adjustment relies largely on containing the wage bill rather than expedited SOE reform.
- Recommendation:
  - For all countries, a credible medium-term fiscal framework, anchored on revised fiscal objectives and revenue mobilization, can enhance confidence and reduce vulnerabilities.

### Low-Income Developing Countries — Financing constraints and trade-offs
- 2020 outcomes:
  - The average overall fiscal deficit increased by 1.5 percentage points of GDP to reach 5.5 percent of GDP.
  - The average public debt increased by 5 percentage points to reach 49.5 percent of GDP at the end of 2020.
  - Total spending remained essentially constant; 60 percent of countries in the group cut capital expenditures as a ratio of GDP relative to pre-COVID-19 projections.
- 2021 and medium term projections:
  - In 2021, the average fiscal deficit is projected to decline to 4.9 percent of GDP.
  - Average fiscal deficit is projected to return to its prepandemic level by 2026, largely aided by revenue increases (Republic of Congo, Haiti, Lao P.D.R.).
  - Average expenditure is projected to broadly stabilize, though some high-debt countries are projected to restrain spending to secure debt sustainability (Republic of Congo, Mozambique, Zambia).
- Debt vulnerabilities and financing:
  - Near-term debt vulnerabilities remain high due to limited market access and restricted ability to increase revenues.
  - Average debt levels are projected to peak in 2021 while continuing to climb in some countries.
  - Elevated debt service relative to tax revenues in many countries (exceeding 20 percent in Ghana, Kenya, Nigeria, and Zambia).
  - Debt distress risks present in several countries.
- International support actions and outcomes:
  - Grants, concessional loans, and debt relief were provided in 2020; beneficiaries included 38 countries (out of 70) assessed to be at high risk of or in debt distress according to IMF–World Bank Debt Sustainability Assessments.
  - As of the end of December 2020, 45 countries (or more than 60 percent of eligible countries) had requested to join or extend the Debt Service Suspension Initiative, benefiting from the suspension of $5 billion total debt service (or an average of 0.6 percent of countries’ public debt) as reported by the Group of Twenty (G20) economies for May through December 2020.
  - Fiscal adjustments in several countries (Vietnam) and debt restructuring (Chad, Republic of Congo) are expected to contribute to debt reduction.
- Policy implication:
  - In the absence of renewed policy efforts domestically and internationally, achieving the SDGs by 2030 would be extremely difficult.

### Risks to the Fiscal Outlook
- Upside and downside risks exist; risks are intertwined and reinforce one another.
- Upside:
  - Faster-than-expected vaccinations, particularly in emerging market and developing economies, could end the pandemic sooner, boosting revenues and allowing earlier unwinding of temporary lifelines.
- Downside risks listed in the source:
  - Protracted economic downturn:
    - Implementation lags or renewed lockdowns could lead to weaker growth.
    - Delays in vaccine deployment and lower efficacy against variants could increase long-term scarring.
    - April 2021 WEO adverse scenario: high and rising infections could restrict mobility and activity, leading to 0.5–1 percentage point lower growth in 2021–22 than the baseline and larger fiscal deficits and debt.
    - Premature scaling back of policy support could cause employment and income losses, exacerbating poverty and inequality.
  - Abrupt tightening of financing conditions:
    - Higher and rising debt increases exposure to abrupt changes in financing conditions.
    - An abrupt surge in yields could worsen financing constraints for emerging market and developing economies.
  - Materialization of contingent liabilities:
    - Nearly 40 percent of global fiscal support constitutes liquidity support measures (loans, guarantees, equity injections, quasi-fiscal operations).
    - Calls on guarantees or widening losses in state-owned enterprises could materialize contingent liabilities, weakening government balance sheets.
    - Surges in bankruptcies could strain public balance sheets through corporate-bank-sovereign links.
  - Volatility in commodity prices:
    - Renewed weakness could worsen revenue outlooks for commodity exporters.
  - Rising social discontent:
    - Pandemic impacts or inadequate policy responses (including unequal vaccine access) could heighten deaths or socioeconomic hardship, weakening trust and policy effectiveness and putting public finances at risk.

### Effectiveness of Discretionary Fiscal Policy Responses to COVID-19
- Aggregate size and composition of fiscal support (through March 17, 2021):
  - Total global pandemic-related fiscal actions: $16 trillion.
  - $10 trillion consists of additional spending and forgone revenue.
  - $6 trillion consists of government loans, guarantees, and capital injections.
- Patterns and composition:
  - Among G20 advanced economies, half of the above-the-line support was devoted to employment protection and household income support.
  - Among emerging market economies, public works and employment protection received the most support.
  - In G20 advanced economies, large firms benefited more from government support (dominated by guarantees and quasi-fiscal activities).
  - Pandemic-related fiscal support in emerging market economies has been frontloaded.
  - A large part of fiscal support is expiring in several countries (e.g., Brazil, China); in only a few cases is it being replaced or substantially extended (France, Japan, Spain, United States).
- Estimated macroeconomic impact:
  - Empirical analysis estimates that government spending and revenue actions mitigated the fall in global growth in 2020 by 2 percentage points.

*International Monetary Fund | April 2021, CHAPTER 1 TAILORING FISCAL RESPONSES.*

### CHAPTER 1 TAILORING FISCAL RESPONSES

### CHAPTER 1 TAILORING FISCAL RESPONSES

### Macroeconomic effects of fiscal measures
- Analysis excludes loans, guarantees, and equity injections because their more limited use in past years compared with the present crisis makes their macroeconomic effects difficult to quantify.
- Countries with larger spending and revenue actions (mostly advanced economies) have experienced smaller output contractions.
- Growth effects of fiscal measures were especially large in Canada, Germany, and the United States.
- Countries relying on consumption- and income-support measures saw effects sooner; countries that made greater use of public investment (for example, China) saw effects with longer lags but longer duration.
- Emerging market economies provided smaller fiscal packages on average but benefited from spillovers from massive monetary and fiscal responses by advanced economies, which eased global financial conditions, limited capital outflow pressures, and supported global demand (despite supply disruptions).

### Private demand and employment effects
- Fiscal support mitigated adverse effects on private demand, private consumption, and unemployment.
- The scale and effect of fiscal support were influenced by public health containment measures; countries that adopted stronger containment measures earlier in 2020 deployed smaller fiscal packages and experienced smaller downward revisions in forecasts of real private consumption and real private demand.
- Larger above-the-budget-line fiscal support for employment (such as wage subsidies and employment-retention programs) is associated with a smaller upward revision in the unemployment rate.

### Labor market effects and trade-offs
- Countries that relied primarily on wage subsidies or job-retention programs often experienced adjustments by reducing the number of working hours rather than mass separations.
- Job-retention programs are powerful at reducing separations and preserving viable job matches but, if overextended, could hamper reallocation to postpandemic jobs.
- High-frequency data show take-up of job-retention programs has declined relative to the spring of 2020, reflecting flexible adjustment in line with increases in working hours.
- Risks:
  - Wage subsidies may have postponed rather than averted layoffs that could occur when support is withdrawn.
  - Workers relying largely on unemployment benefits may become structurally unemployed if skills erode before job creation resumes.
- Policy implication: support should be adjusted over time, shifting toward reallocation measures during the recovery phase (see Chapter 3 of the April 2021 World Economic Outlook).

### Social safety nets: scope, adequacy, and outcomes
- Additional social protection spending in response to COVID-19 was 0.6 percent of GDP on average during the first three quarters of 2020, including to widen social safety nets (Gentilini and others 2020).
- Increased social protection spending has mitigated the rise of global extreme poverty by about 10 million people (October 2020 Fiscal Monitor).
- During the COVID-19 crisis, the share of the population covered by social safety nets increased in emerging market and developing economies, with significant cross-country variation.
- Regional patterns noted:
  - Middle East and North African countries recorded the highest rise in coverage but the lowest increases in adequacy of benefits—reflecting untargeted support.
  - Latin American and Caribbean countries doubled adequacy levels while keeping relatively high coverage.
- Remaining issues: preexisting gaps could hamper cost efficiency; recommended durable reforms include reducing leakages to high-income groups, addressing program fragmentation, and expanding coverage.

### Near-term policies: vaccination and targeting support
- Imperatives:
  - Ensure health care systems are adequately resourced.
  - Reinforce global cooperation on producing and distributing vaccines to all countries at affordable prices.
  - Scale up funding for COVAX.
- Upside scenario (April 2021 World Economic Outlook): faster global vaccination brings the virus under control sooner and yields a global gain in GDP of $9 trillion cumulatively through 2025, with two-fifths of that gain accruing to advanced economies.
- Fiscal revenue implication under that scenario:
  - Assuming a tax-to-GDP ratio of 30 percent on average and unit elasticity of revenues with respect to output, this translates to a $1 trillion cumulative gain in revenues for advanced economies, plus savings from reduced spending on lifelines for people and firms.
- Cost-benefit note: the cost of global vaccination is estimated in the tens of billions of dollars, implying a strong return on investment.
- Policy sequencing: as lockdowns localize and recoveries accelerate, lifelines should be better targeted toward those still significantly affected; support should rotate toward structural transformation (vocational training, hiring incentives, balance sheet repair of nonfinancial firms).
- Program management:
  - Many programs are set to expire before vaccinations end; countries need to maintain support flexibly while refining design and eligibility as trade-offs evolve.
  - Emergency lifelines should be withdrawn only gradually where local transmission has been persistently low and activity has normalized.
  - If the pandemic and economic indicators worsen, withdrawal should be paused or reversed; measures may need extension with contingent spending plans (supplementary budgets or COVID-19 contingency funds).
  - Transparency in usage and careful management of fiscal risks from contingent liabilities are crucial given their scale, coverage, and novelty.

### Targeting support to vulnerable households
- The pandemic disproportionately affected poor people, youth, women, minorities, and workers in low-paying jobs and the informal sector.
- Policymakers should ensure social protection spending is sustainable and enhance effectiveness through better targeting:
  - Improve cost-effective coverage by limiting leakages to unintended beneficiaries; options include enhanced means testing in advanced economies and proxy means testing in emerging market and developing economies using household characteristics strongly associated with welfare.
  - Use instruments effective for reaching individuals in the informal sector (noting two-thirds of workers in the informal sector in sub-Saharan Africa do not have access to banking or other financial services). Effective instruments include government-to-person payments, mobile money, in-kind transfers such as food assistance, basic education and health care services, matching beneficiary databases to create single registries, and community-based methods to identify needy households.
  - Increase the progressivity of net transfers by reducing the benefit withdrawal rate as earnings increase; consider extending unemployment benefits for longer periods (possibly at reduced levels) and implementing gender budgeting.

### Support to otherwise viable nonfinancial firms
- Government support to nonfinancial firms in 2020 was timely and reduced liquidity shortages, job losses, and bankruptcies.
- Targeting issues:
  - With limited information on firm viability, support was sometimes not sufficiently targeted.
  - One-fifth of nonfinancial firms that received government support did not experience a large direct adverse effect on their operations, leading to substantial mismatches in access to public credit or other liquidity programs.
  - In some cases, low demand, administrative capacity constraints, or conditionality contributed to a low take-up rate of loan guarantees (Germany, United States).
- Distributional pattern: larger firms had better access to support.

*Source: CHAPTER 1 TAILORING FISCAL RESPONSES (ch1 - CHAPTER 1 TAILORING FISCAL RESPONSES)*

### CHAPTER 1 TAILORING FISCAL RESPONSES

### CHAPTER 1 TAILORING FISCAL RESPONSES

### Liquidity programs and firm-level support
- Various liquidity programs have covered one-quarter of the surveyed nonfinancial firms, with larger firms being more likely to receive public support than small and medium-sized enterprises.
- Public support should be limited to circumstances with a clear market failure, including:
  - when a high degree of uncertainty deters flows from banks and capital markets to nonfinancial firms;
  - when private participants fail to internalize the social cost of widespread bankruptcies and job losses;
  - when private and public mechanisms are inadequate to resolve insolvency problems in a timely and effective way.
- To tackle widespread insolvencies, (quasi) equity injections such as junior “profit participation” loans could be considered, if fiscal space and implementation capacity exist (Díez and others 2021).
- Governments should roll back blanket loans and guarantees when appropriate.

### Fiscal needs, constraints, and external assistance
- Budget needs expected to remain sizable, including for:
  - widespread vaccinations;
  - continued targeted lifelines adapted to recurring waves of contagion;
  - broad-based demand support, depending on fiscal space and macroeconomic conditions.
- Highly indebted emerging market and developing economies face:
  - tight financing constraints;
  - limited capacity for social protection and domestic revenue mobilization.
- Fragile states or countries at risk of debt distress have even more limited near-term support scope.
- Several countries will need international assistance: grants, concessional and emergency loans, and in some cases debt restructuring of commercial and official debt.
- Quick implementation of the G20 Common Framework for Debt Treatments and widening its country coverage of eligible debtors is necessary.

### Broader policy priorities and medium-term frameworks
- Trade-off: continuing near-term support versus strengthening fiscal positions over time can be made more palatable within credible medium-term fiscal frameworks attuned to economic developments.
- Where recovery is faster and more complete, lifelines could be withdrawn faster and fiscal buffers built more quickly.
- Once recovery is firmly in place, implement calibrated consolidation strategies supported by pro-growth and inclusive measures—especially in advanced economies with elevated debt and structural pressures.
- Early development and announcement of medium-term strategies can create near-term fiscal space and anchor sustainability.
- Commitment devices and enhanced transparency/accountability (including strengthened rules-based or principles-based fiscal frameworks and preapproval of future tax reforms) can enhance credibility.
- Use of escape clauses or temporary suspension of fiscal rules provided flexibility; countries should clearly communicate pathways for reinstating rules and, where needed, recalibrate rules’ limits or design.

### Low-income countries, SDGs, and revenue mobilization
- COVID-19 has set back progress toward achieving the SDGs.
- Financing needs for SDGs were already large before the pandemic and, based on analysis of four low-income countries and emerging market economies, would likely rise further by 2.5 percentage points to 4 percentage points of GDP in those countries, depending on potential scarring effects (Benedek and others 2021).
- Revenue collection should be bolstered through a medium-term revenue strategy coordinating tax policy and revenue administration:
  - implement well-designed value-added taxes with timely refunds;
  - build capacity for property taxation;
  - gradually expand the base for corporate and personal income taxes, including by eliminating costly tax exemptions;
  - efficiently tax extractive industries (IMF 2019a);
  - adopt a comprehensive risk-based strategy, focusing on large taxpayers, to improve compliance.
- Concerns about VAT's impact on low-income households can be addressed by strengthening social safety nets (Chapter 2).

### Debt management, transparency, and fiscal risks
- Need to improve debt management and transparency:
  - Advanced economies and some emerging markets could lock in historically low borrowing costs and extend average debt maturities.
  - Low-income countries should close gaps in debt operations: weak legal frameworks, lack of operational risk management, insufficient audits, and incomplete coverage of debt statistics (notably debt contracted through autonomous public entities, extrabudgetary funds, and state-owned enterprises off budget).
  - Measures: publish regular debt reports, broaden coverage of debt statistics, limit risks from contingent liabilities.
- All governments need to monitor and manage fiscal risks associated with pandemic-related support and disclose contingent liabilities comprehensively.

### Fiscal package simulations: design, timing, and composition
- Simulations calibrated to roughly match the deep contraction of global GDP in 2020 consider temporary transfers to lower-income households, frontloaded public investment, and higher labor income taxes in the medium term (Online Annex 1.1).
- Benchmark package composition (as specified in figure note):
  - targeted transfers to low-income households: 2 percent and 1.5 percent of GDP for years one and two, respectively;
  - public investment: 0.5 percent of GDP for the first two years and declining gradually;
  - delayed increase in labor income tax rates for high-income households by 0.5 percentage points at the peak.
- Two key insights from the model:
  - Timing is critical: greater short-term fiscal support is beneficial when interest rates are low and economic slack is high; strengthen fiscal positions once recovery is underway.
  - Composition matters: reliance on high-multiplier expenditure measures and progressive personal income taxation can raise growth and mitigate income inequality while containing increases in public debt over time.
- Simulation outcomes and multipliers:
  - The fiscal package would increase output with a two-year cumulative output multiplier of slightly more than 1, given the low-interest-rate environment and accommodative monetary stance, spike in unemployment and its partial recovery, firm-level excess capacity, and composition of measures.
  - The long-term multiplier could be close to 2, assuming a persistent increase in productive public investment.
- Transfers boost income and consumption for low-income households; increased taxes are borne by high-income households over the medium term.

### Timing, quality of public investment, and medium-term adjustment
- Postponing quality public investment limits the expansionary effect of targeted transfers because public capital complements private investment in a low-interest-rate environment.
- Delaying high-return public investment increases aggregate demand when recovery is more advanced and interest rates likely higher, making the same investment less expansionary.
- For countries with fiscal space, an early push for quality public investment maximizes growth effects; refining pipelines and resolving bottlenecks helps scale-up.
- Pandemic-related investments in health care and vaccination should be maintained as a priority.
- When recovery is underway, focus should shift to rebuilding buffers and reducing debt vulnerabilities.
- Medium-term adjustment needs are smaller if short-term support is based on high-quality and frontloaded measures.
- Fiscal positions strengthened through more progressive personal income taxation over the medium term tend to be more equitable.
- Fiscal adjustments via higher capital income tax rates (if not on rents) generate a fiscal multiplier below 1 in the long term and have a stronger negative effect on private investment.

### Recovery priorities: green, digital, and inclusive transformation
- As vaccinations advance and economies recover, fiscal policy should enable a green, digital, and inclusive transformation while managing fiscal and financing risks.
- Priority areas include:
  1. investing for the future and improving health care and education outcomes;
  2. facilitating reallocation of labor and capital;
  3. improving coverage and adequacy of social protections cost-effectively to counter inequality and poverty (Chapter 2);
  4. reforming tax systems, including at the international level;
  5. reducing debt vulnerabilities and enhancing debt transparency.
- Investment projects should aim at mitigating climate change and facilitating digitalization, with private sector participation where possible and partial financing from higher carbon taxes.
- In low-income countries, green investment can be facilitated through official support combined with domestic and international private finance and improved public investment management.
- Strengthening social safety nets and addressing tax system weaknesses (improving progressivity, reforming international tax systems, broader tax bases, more neutral capital taxation, better VAT design, greater use of carbon/property/inheritance taxes, digital enhancements, and institutional strengthening) can support inclusive growth.

### Tracking, transparency, and auditing of COVID-19 spending
- Since the pandemic onset, many countries have committed to track and transparently report emergency COVID-19 spending.
- Innovative practices across three areas: tracking COVID-19 spending; ensuring transparency of COVID-19 responses (including procurement contracts); auditing COVID-19 spending.
- Tracking practices:
  - Some countries implemented measures through normal budget channels while adapting budget nomenclature, programs, and financial management information systems (e.g., Burkina Faso, France).
  - Countries with modern charts of accounts and FMIS (e.g., Honduras, Rwanda) have tagged COVID-19 spending; others (e.g., Benin) used mechanisms beyond FMIS to monitor off-budget implementing agencies.
  - More than 40 countries have established dedicated COVID-19 funds to centralize emergency responses and keep an audit trail (IMF 2020c); safeguards include strong legal backing, a clear “sunset clause,” well-defined PFM processes, and robust accounting and reporting standards (example: Sierra Leone).
- Transparency practices:
  - COVID-19–related information is typically included in regular budget execution reports (example: Austria); some countries produce dedicated reports (example: Maldives).
  - Dedicated transparency portals (examples: Colombia, France, Honduras, Peru) provide comprehensive, promptly updated pictures of support expenditure; good practices include overview of the response including off-budget measures, cross-sectional spending information (example: Brazil), and open access to microdata (examples: Paraguay, United States).
  - Countries such as Jordan and Papua New Guinea publish procurement contract information including beneficial ownership, as committed when accessing IMF emergency funding.
  - Some countries (Ecuador, Kenya, Kyrgyz Republic, Nicaragua) amended procurement legal frameworks to require collection of beneficial ownership information.

*International Monetary Fund | April 2021*

### Box 1.1. Keeping the Receipts: One Year On, Some Innovative Practices

### Box 1.1. Keeping the Receipts: One Year On, Some Innovative Practices

### Transparency and procurement data
- Governments expanded online publication of emergency procurement data; examples include Colombia, Honduras, and Ukraine adding modules in e‑procurement platforms presenting detailed information on all emergency procurement related to COVID-19.
- Civil society and the media complemented government transparency efforts:
  - In South Africa, volunteers disseminated government-published procurement data via a platform called “Keep the Receipts.”
  - The Latin American Journalists Network for Transparency and Anti-Corruption, Red PALTA, used procurement data from seven Latin American countries to publish articles tracing overpricing and corruption in the purchase of medical equipment.

### Scrutiny and auditing of COVID-19 spending
- Supreme audit institutions stepped in to provide stronger and more timely ex post controls to mitigate relaxed ex ante controls:
  - Interim audits were undertaken in Honduras, Peru, Sierra Leone, and South Africa to uncover irregularities and tackle governance vulnerabilities as they happen.
  - Outcomes in South Africa: more than one-third of auditees have taken actions to address identified irregularities; the Unemployment Insurance Fund has recovered R3.4 billion (US$220 million) of incorrect payments; the president set up a high-level task force to address allegations of corruption (Auditor General of South Africa 2020).
  - In January 2021 the European Court of Auditors published a first review of the European Union’s emergency response until mid-2020 and announced that one-quarter of its audits in 2021 would focus on the European response to fighting the pandemic.
- Other independent watchdogs have played roles:
  - Austria’s Parliamentary Budget Office spearheaded transparency efforts.
  - Kenya’s Ethics and Anti-Corruption Commission issued a report indicating procurement laws were violated in purchases of COVID-19–related supplies.

### Key elements of support to firms
- Partnering with the private sector to assess firm viability:
  - Where governments lack capacity to assess financial health of each firm (especially small and medium-size enterprises), the private banking sector, capital markets, sovereign wealth funds, or development banks may perform this function.
  - To avoid moral hazard among private lenders, loan guarantees should gradually be made partial.
- Targeting support to viable firms:
  - The April 2021 Global Financial Stability Report discusses identifying illiquidity and solvency risks for firms with access to capital markets or banks.
  - Fiscal support (together with regulatory measures) can prevent a large increase in bankruptcies.
  - Governments could facilitate restructuring of firms with viable business plans by making loan write-offs tax deductible for creditors.
  - For microenterprises and informal sector firms, support may need to be channeled through microcredit institutions.
  - Policymakers should allow gradual exit of nonviable firms and reallocation of labor with help from targeted time-bound hiring subsidies, wage-loss insurance programs, and increased training, facilitated by streamlined, standardized restructuring or bankruptcy procedures.
  - Support could depend on objectives such as fostering digitalization and improving energy efficiency.
- Encouraging greater reliance on equity financing:
  - Government guarantees on bank loans should be reduced over time and linked to restrictions on dividends and share buybacks.
  - Guarantees or insurance could be offered for portfolios of privately funded and managed distressed assets rather than individual loans, with better risk pricing so viable firms access credit at lower rates.
  - Targeted quasi equity injections could be considered if the social cost of mass bankruptcies exceeds private costs; examples include profit participation loans for small and medium-sized enterprises.
  - Governments could consider conversion of guaranteed debt into equity and quasi equity for highly indebted but viable firms, especially large firms or those with strong economic and social rationale for intervention.
  - Example: Germany’s temporary “umbrella” program—authorized by the European Commission—uses all classes of equity and hybrid instruments to support firms affected by the pandemic.
  - Risks of government equity stakes: political interference in firms; oversight and governance burdens for governments; competitive neutrality concerns for the economy.
  - Experience from the global financial crisis suggests direct public involvement in private balance-sheet restructurings can, in some cases, prevent tail-risk events; crucial to ensure public support is done transparently at arm’s length, consistent with overall policy goals, and with a clear exit strategy (including to minimize fiscal risks).

### Policy support to nonfinancial firms (schematic policy considerations)
- For systemic or network firms (large) and for firms that are liquidity constrained, viable but insolvent, or nonviable, policies range across:
  - Targeted, temporary, and state-contingent tax and social security contribution deferrals or subsidies (for example, to cover wages) for firms in affected sectors, especially when containment restrictions curtail demand.
  - As the economy reopens, shift focus to fiscal measures to stimulate domestic demand: infrastructure investment, temporary reduction in taxes (such as VAT or accelerated depreciation), cash transfers to individuals based on income.
  - Partial guarantees; direct loans with restrictions; temporary debt repayment moratoriums or temporary suspension of insolvency rules.
  - Standardized partial guarantee programs and direct loans (such as using development banks) for medium and small firms.
  - Temporary reduced utility tariffs; micro-lending programs through banks; temporary reduction of evictions for micro and informal sector; provide debt discharge through streamlined liquidation procedures; enhance unemployment benefits; sponsor innovation funds alongside private sector to support micro startups.
  - Restructuring options: out-of-court financial restructuring; hybrid restructurings/prepackaged reorganization; foster debt restructuring by making debt forgiveness nontaxable, providing tax credits to creditors that grant haircuts to debtors, or applying larger haircuts on government claims.
  - Equity-like funding: fresh equity investment alongside private investors; infusion of equity with restrictions if closing a firm would have negative effects on economic activity; providing a business reorganization plan as an option rather than bailing out inefficient state enterprises.
  - Institutional measures: seed privately run special financing facilities for distressed enterprises under reorganization; bolster formal bankruptcy system resources; develop streamlined or standardized liquidation procedures.

### Flexibility of fiscal rules during the COVID-19 pandemic
- Many countries used built-in adjustments or escape clauses in fiscal rules in 2020; such deviations were often based on predefined processes involving governments, parliaments, and, in some cases, fiscal councils.
- Types of provisions used:
  - Supranational escape clauses: activation in some regional blocs automatically triggered national ones (examples cited include Central African Economic and Monetary Community, Eastern Caribbean Currency Union, European Union), leading to automatic national activations in some countries (France, Italy, Portugal); other countries used separate national escape clauses (Czech Republic, Germany).
  - National escape clauses: countries with escape clauses resorted to them (Armenia, Austria, Azerbaijan, Brazil, Costa Rica, Croatia, Estonia, Grenada, Honduras). Some escape clauses include quantitative triggers; example: India allows temporary deviations from the target fiscal deficit (not exceeding 0.5 percentage points in a year) if real output growth declines by at least 3 percentage points below the average for the previous four quarters.
  - Suspension or change of fiscal rules and numerical targets: several countries without escape clauses temporarily suspended their fiscal rules (Colombia, Ghana, Poland, Russian Federation). Paraguay and Peru suspended their fiscal rules entirely until the end of 2021. In some cases, suspensions were verified by independent fiscal councils. Indonesia suspended the balance budget target of 3 percent of GDP for three years. Chile, Mexico, and Uruguay modified fiscal targets within existing frameworks.
- Transitioning back to rules:
  - Example: Canada plans to gradually unwind support measures using data-driven triggers such as employment or total hours worked rather than a predetermined calendar.
  - Policymakers must balance continued flexibility to counter the pandemic and support recovery against preserving market confidence, especially when debt and gross financing needs are high.
  - Brazil prioritized debt stability by withdrawing most COVID-related fiscal support measures at end-2020 and aimed to meet the expenditure ceiling in 2021; a constitutional amendment exempted a recently announced round of cash transfers from the rule but limited it to 0.6 percent of GDP.
  - Preserving credibility requires that flexibility be temporary and transparent, including communicating the return-to-rule process, announcing a realistic medium-term path, and, in some cases, improving rule design or recalibrating limits for postpandemic circumstances.

### International corporate taxation: two-pillar Blueprints and considerations
- Context:
  - Profit attribution among multinational affiliates allows scope for cross-border profit shifting; digitalization exacerbates weaknesses because taxing rights are primarily assigned on physical presence, enabling highly digitalized firms to earn significant profits in “market countries” without incurring income tax liability there.
  - Anti-tax avoidance measures often remain ineffective in developing countries due to limited administrative capacity.
- G20/OECD Inclusive Framework Blueprints (October 2020) on two pillars:
  - Pillar One:
    - Aims to address digitalization by assigning some taxing rights to market countries via a formula based on the share of sales to reallocate a share of “residual” profits (profits roughly in excess of a normal return) earned by large multinationals operating in certain sectors (automated digital services and consumer-facing businesses) to market countries.
    - The proposal lacks a coherent economic rationale, is highly complex, and does not yet specify several substantive issues (such as the portion of profit to be reallocated).
    - OECD (2020) estimates Pillar One would increase global corporate tax revenues by ¼ to ½ percent.
  - Pillar Two:
    - Targets tax competition and limits profit shifting by ensuring profits of large multinationals are subject to at least some minimum level of taxation.
    - Envisages an “outbound” tax rule (an “income inclusion rule”) charged by residence countries on low-taxed foreign earnings, and two “inbound” rules (a principal “undertaxed payment rule” denying deductions for payments not taxed at a sufficient rate elsewhere, and a separate “subject to tax rule” permitting source countries under tax treaties to impose withholding taxes).
    - OECD estimates Pillar Two would raise global corporate tax revenues by between 1¾ and 2¾ percent.
    - Concerns: the proposal is likely to benefit advanced economies more than developing countries because the proposed effective priority of the “outbound” rule over the principal “inbound” rule means revenue from “topping up” taxes on lightly taxed income in source countries would accrue to residence countries.
- Political and implementation considerations:
  - Agreement by mid-2021 is an ambitious target; key features to be agreed include:
    1. The rule order in Pillar Two, with developing countries seeking a greater role for the inbound rule.
    2. The scope of Pillar One, with some European countries focusing on automated digital services, while the United States asserts a broader reform beyond digital companies.
    3. The level of the minimum effective tax rate—with the range between 9 percent and 12½ percent being discussed and seen as too low by some.
  - Reaching political agreement is important to avoid unfettered tax competition and proliferation of unilateral measures (such as digital service taxes) that could give rise to tax and trade wars.
  - Even if agreement is reached, pressures for further reforms will likely continue given the relatively narrow scope and limited estimated effect of the Blueprints.

*Italic source: IMF staff compilation from Box 1.1, Chapter 1, Fiscal Monitor: A Fair Shot, April 2021.*

### Box 1.4. Toward an Agreement on Reforming International Taxes

### Box 1.4. Toward an Agreement on Reforming International Taxes

### Content provided
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- No substantive text from Box 1.4 (findings, projections, analysis, or policy recommendations) is present in the supplied content.

### Implications for summarization
- Unable to extract or restate substantive findings, projections, analysis, or policy recommendations from Box 1.4 because the supplied content contains only references.
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*Source: ch1 - Box 1.4. Toward an Agreement on Reforming International Taxes (PDF chapter excerpt with references).*

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_Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2021/april/english/ch1.pdf_