## Chapter 1: Fiscal Policy from Pandemic to War ## Source details **Canonical URL:** [Chapter 1: Fiscal Policy from Pandemic to War](https://www.imf.org/-/media/files/publications/fiscal-monitor/2022/april/english/ch1execsum.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fiscal-monitor/2022/april/english/ch1execsum.pdf.md) - [Structured JSON version](/-/media/files/publications/fiscal-monitor/2022/april/english/ch1execsum.pdf.json) --- ### Context and immediate impacts - Just as uncertainty associated with the COVID-19 pandemic was abating, Russia invaded Ukraine; uncertainty endured, shifting from pandemic to war. - The war is causing costly displacement of refugees and loss of human capital, disrupting commodity markets, and further fueling inflation. - Since the war started, more than 4.5 million refugees have fled Ukraine as of April 10. - Higher food and energy prices raise the risks of social unrest. - Emerging markets and low-income developing countries serving as net importers of energy and food will be hit by elevated international prices, putting pressure both on growth and public finances. - Some commodity exporters, especially large oil exporters, will benefit from significant revenue windfalls. - The COVID-19 pandemic produced uneven effects on households’ incomes and poverty: - An estimated 70 million more people (relative to the prepandemic trend) experienced extreme poverty in 2021. - Poverty was stable or even declined where fiscal support was large. - With fiscal support, household incomes grew or were stable in 2020 in some advanced and emerging market economies despite an economic recession. - Amid COVID-19 restrictions and high uncertainty, household savings rose sharply relative to prepandemic levels—by a combined $3½ trillion in the United States and the European Union during 2020–21. - Fiscal support was insufficient to prevent a fall in household income in many developing economies. ### Inflation, inflation surprises, and fiscal implications - Above-target inflation rates and inflation surprises—the difference between actual and projected inflation rates—and monetary policy reactions to them have significant implications for public budgets. - Inflation surprises reduced public debt-to-GDP ratios in 2021 by: - 1.8 percentage points of GDP in advanced economies (excluding China). - 4.1 percentage points of GDP in emerging market economies (excluding China). - Although inflation surprises can reduce deficits in the short term—as nominal revenues increase faster than nominal spending—their relief to public finances is usually temporary. - If inflation expectations and inflation volatility increase, government bonds become less attractive to investors, and the costs of borrowing rise. ### Fiscal outlook and debt projections - The fiscal outlook is subject to elevated uncertainty, as the full consequences of the war and spillovers from sanctions on Russia are unknown and will vary across countries. - Deficits are falling globally but are expected to remain above prepandemic levels. - Public debt projections: - Average public debt in advanced economies is projected to decline to 113 percent of GDP by 2024. - Public debt is projected to continue to rise in emerging markets, mainly driven by China, reaching 72 percent of GDP by 2024. - Among low-income developing countries, debt is expected to gradually decline to 48 percent of GDP by 2024. - Public debt is expected to go down faster in commodity exporters thanks to positive terms-of-trade shocks. - There are large risks around the outlook for deficits and debt, especially if economic growth disappoints or inflation dynamics continue to surprise. ### Fiscal policy recommendations and trade-offs - High uncertainty and marked divergences across countries require a tailored and agile fiscal policy response. - To support economies hardest hit by the war, fiscal policy should address the humanitarian crisis and economic disruption. - Given rising inflation and interest rates, fiscal support should: - Target those that are most affected. - Focus on priority areas. - If economic activity deteriorates significantly, broader fiscal support could become appropriate for countries with fiscal space, but should be done in ways that avoid exacerbating demand-supply imbalances and price pressures. - In countries where economic growth is less exposed to the conflict and central banks are raising rates to fight high inflation, fiscal policy should move away from the exceptional support provided during the pandemic towards normalization. - In many emerging markets and low-income developing countries, trade-offs are harsher: - Higher inflation and tightening global financial conditions call for prudence. - Fiscal support is needed for countries hardest hit by higher commodity prices and where the recovery was already weak. - Fiscal reforms to ease trade-offs: - Sound and credible medium-term fiscal frameworks help manage market expectations and contain sovereign borrowing costs. - Reprioritizing spending (for example, safety nets and defense) and mobilizing revenues to address mounting public spending pressures. ### Measures on energy and food prices; guidance - Governments are taking measures to shield economies from the spike in international energy and food prices; these can protect vulnerable households and preserve social cohesion but can also have undesirable consequences and large fiscal costs. - Common policy actions observed: - Limiting the rise in domestic prices (cut taxes or grant subsidies), which could exacerbate global imbalances between demand and supply, put further upward pressure on international prices, and lead to energy or food shortages—hurting low-income countries that import energy and food. - Providing generalized subsidies or transfers, which can imply large fiscal costs. - Recommended approach: - Provide targeted, temporary, and direct support to vulnerable households, while allowing domestic prices to adjust. - This strategy would contain fiscal pressures and preserve incentives for the private sector to increase supply of energy and food. - Measures to address immediate needs from high food and energy prices should not detract from action to tackle long-standing challenges such as climate change. - It is more urgent to ensure greater resilience through investment in health, food, and energy security from cleaner sources. - Moving toward a more diverse, clean, and renewable energy matrix will ensure energy security and facilitate the green transition. - Increases in carbon taxes in most countries envisage a gradual phasing-in that is far smaller and more predictable than recent gyrations in energy markets. - Short-term responses to high energy prices should avoid investing in long-duration and capital-intensive fossil fuel projects. ### Global cooperation - Global cooperation is essential to: - Address the consequences of the COVID-19 pandemic and energy and food disruptions. - Help refugees from the war. - Prevent and prepare for future potential pandemics. - Mitigate climate change. - Unilateral actions, such as restricting food exports, could worsen the food crisis. - International cooperation priorities include: - Addressing supply concerns on fertilizers and food products, like wheat, toward supporting the most vulnerable populations. - Cooperation in corporate taxation, transparency, exchange of information for personal taxation, and carbon pricing to mobilize resources, promote necessary investments, reduce inequality, and alleviate perceptions that the tax burden is not distributed fairly. - Financial and technical support for low-income developing countries. - A multilateral cooperative approach for debt reprofiling or restructuring where high debts become unsustainable, going beyond SDR channeling when called for. *International Monetary Fund | April 2022* --- _Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2022/april/english/ch1execsum.pdf_