## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/fiscal-monitor/2022/april/english/execsum.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fiscal-monitor/2022/april/english/execsum.pdf.md) - [Structured JSON version](/-/media/files/publications/fiscal-monitor/2022/april/english/execsum.pdf.json) --- ### Chapter 1: Fiscal Policy from Pandemic to War - Context and shocks - Just as uncertainty associated with the COVID-19 pandemic was abating, Russia invaded Ukraine; uncertainty endured, shifting from pandemic to war. - Besides the death toll, human misery, and destruction of infrastructure, 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. - Fiscal role and constraints - Fiscal policy can protect the most vulnerable from the impact of high and rising food and energy prices on household budgets. - Governments’ responses are shaped against high and increasing inflation; slowdown in growth; high debt; and tightening credit conditions as central banks hike interest rates. - Budget constraints are increasingly binding. - Distributional and cross-country effects - Emerging markets and low-income developing countries that are net importers of energy and food will be hit by elevated international prices, putting pressure on growth and public finances. - Some commodity exporters, especially large oil exporters, will benefit from significant revenue windfalls. - 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. - Household savings rose sharply relative to prepandemic levels—by a combined $3½ trillion in the United States and the European Union during 2020–21. - In many developing economies, fiscal support was insufficient to prevent a fall in household income. - Inflation surprises and public finances - Above-target inflation rates and inflation surprises—the difference between actual and projected inflation rates—and monetary policy reactions have significant implications for public budgets. - Inflation surprises reduced public debt-to-GDP ratios in advanced and emerging market economies (excluding China) by 1.8 and 4.1 percentage points of GDP in 2021. - 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; higher inflation expectations and volatility can raise sovereign borrowing costs. - Fiscal outlook and projections - Deficits are falling globally but are expected to remain above prepandemic levels. - The average public debt in advanced economies is projected to decline to 113 percent of GDP by 2024. - 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. - Large risks remain around deficits and debt, especially if economic growth disappoints or inflation dynamics continue to surprise. - Policy guidance - High uncertainty and marked divergences across countries require tailored and agile fiscal responses. - 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 most affected and focus on priority areas. - If economic activity deteriorates significantly, broader fiscal support could become appropriate for countries with fiscal space but should avoid exacerbating demand-supply imbalances and price pressures. - 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 exceptional pandemic support toward normalization. - In many emerging markets and low-income developing countries, trade-offs are harsher: higher inflation and tightening global financial conditions call for prudence, whereas fiscal support is needed for those hardest hit and where the recovery was already weak. - Fiscal reforms (sound and credible medium-term fiscal frameworks, reprioritizing spending, mobilizing revenues) can ease trade-offs and contain sovereign borrowing costs. - Policy on energy and food price responses - Governments are taking measures to shield economies from the spike in international energy and food prices, but some measures (cutting taxes or granting subsidies to limit domestic price rises) can exacerbate global imbalances and lead to shortages. - Generalized subsidies or transfers can imply large fiscal costs. - A better solution is targeted, temporary, and direct support to vulnerable households while allowing domestic prices to adjust—containing fiscal pressures and preserving incentives for the private sector to increase supply of energy and food. - Short-term responses should not detract from action on long-standing challenges such as climate change; investment in health, food, and energy security from cleaner sources enhances resilience. - 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 COVID-19 consequences, energy and food disruptions, refugee needs, future pandemics, and climate change. - Unilateral actions, such as restricting food exports, could worsen the food crisis. - Cooperation is crucial to address supply concerns on fertilizers and food products, like wheat, and to support the most vulnerable populations. - International cooperation in corporate taxation, transparency and exchange of information for personal taxation, and carbon pricing can mobilize resources to promote investments, reduce inequality, and improve perceptions of fairness in the tax burden. - Financial and technical support for low-income developing countries is warranted. - Where high debts become unsustainable, reprofiling or restructuring requires a multilateral cooperative approach that goes beyond SDR channeling. ### Chapter 2: Coordinating Taxation across Borders - Rationale for international coordination - Mobilizing tax revenues, enforcing tax rules, and mitigating climate change are common concerns; international coordination can help in corporate taxation, personal taxation, and carbon pricing. - Insufficient coordination leads to unsatisfactory outcomes (for example, tax-base attraction, downward tax competition, emissions leakage). - Effective coordination in corporate and income taxes requires global participation; an agreement among a small number of key emitting countries could curb global warming. - Corporate tax coordination and the two-pillar agreement - The October 2021 two-pillar agreement under the Inclusive Framework on Base Erosion and Profit Shifting—to date agreed to by 137 jurisdictions—will significantly improve the taxation of multinationals when implemented. - Under Pillar 1: - Allocating a portion of the tax base to market countries (allowing them to tax even without a physical presence) is more efficient than unilateral digital-services taxes. - The scope of such a reallocation covers only 2 percent of global profits of multinational corporations, but the global revenue impact is broadly comparable with revenues from existing unilateral digital-services taxes. - Under Pillar 2: - A corporate minimum tax of 15 percent reduces firm incentives to shift profits across countries and puts a floor on tax competition—giving countries room to raise corporate income taxes, including by revisiting wasteful tax incentives. - The minimum tax is estimated to raise global corporate income tax revenues by 5.7 percent through the top-up tax and potentially by an additional 8.1 percent through reduced tax competition. - Country and firm responses are essential for realizing the gains. - Further actions to incorporate low-income countries’ interests include tax simplification measures, strengthening withholding taxes on specific cross-border payments, and facilitating timely access to country-by-country information on multinationals. - Personal tax and exchange of information - International cooperation on information sharing can curtail offshore tax evasion; building on progress through the Global Forum on Transparency and Exchange of Information for Tax Purposes, three directions for reform are highlighted: - Establish beneficial ownership registries, or comparably efficient alternative mechanisms, so tax authorities may access reliable and up-to-date beneficial ownership information. - Build capacity in data analytics and specialized units in tax administrations, especially for low-income countries, to support tax compliance. - As cooperation improves, adjust tax policy, especially regarding those at the top of the income distribution, in countries where implementation capacity constrains tax policy choices. - As cross-border remote work opportunities expand, a bigger segment of the labor income tax base becomes more mobile—estimated currently at 1¼ percent of the global personal income tax base—making personal tax coordination increasingly important. - Carbon-pricing coordination - Urgent actions and coordination are required to curtail emissions; price-based approaches such as carbon taxation or emission-trading systems are generally the most efficient, though alternative approaches like regulations can be accommodated. - Main findings: - Reinforcing the Paris Agreement with an international carbon price floor for key emitting countries (accommodating alternative approaches through equivalent price calculations) can limit global warming to 2°C or less, while accommodating differentiated responsibilities by income level. - Implementing such an agreement would reduce emissions in 2030 by 35–50 percent below baseline levels for advanced economies and 20–30 percent for emerging market economies, assuming measures equivalent to a carbon price of $75 per ton for advanced economies, $50 per ton for high-income emerging market economies such as China, and $25 per ton for low-income emerging market economies such as India. - Nonpricing policies such as regulations can be accommodated through a consistent cross-country method to map agreed emission reductions into an equivalent carbon price as a common metric. - International coordination is essential to overcome the limits of unilateral action; recent progress in income tax coordination demonstrates that tangible results are achievable. - The priority is to agree on concrete plans to limit global warming to below 2°C. *International Monetary Fund | April 2022* --- _Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2022/april/english/execsum.pdf_