## EXECUTIVE SUMMARY

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**Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/fiscal-monitor/2022/october/english/execsum.pdf)

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### Current Developments
- Rising inflation and climbing interest rates have supplanted more than a decade of muted inflation and low interest rates in many countries.
- Recession concerns are surfacing and geopolitical tensions have increased further as Russia’s invasion of Ukraine persists (October 2022 World Economic Outlook).
- Fiscal policy trade-offs are increasingly difficult, especially for high-debt countries where responses to the COVID-19 pandemic exhausted their fiscal space.
- Households are struggling with elevated food and energy prices, raising the risk of social unrest.

### A Shifting Landscape Puts Pressure on Budgets
- In 2021 and 2022, fiscal deficits have fallen sharply in advanced and emerging market economies but remain larger than prepandemic levels across income groups.
- Many oil exporters are now running fiscal surpluses because of higher oil revenues; China’s deficit is projected to widen in 2022 as growth slows and inflation remains low.
- For low-income developing countries, which had a relatively mild fiscal response to the pandemic, the average deficit has barely changed.
- Global government debt is projected to be 91 percent of GDP in 2022, which is about 7.5 percentage points above the prepandemic levels.
- Debt decreased in many countries because of deficit reduction, economic recovery, and inflation shocks.
- The UN Food and Agriculture Organization’s Food Price Index for August 2022 was 45 percent higher than in 2019.
- Governments have implemented new measures, including price subsidies, tax cuts, and cash transfers; in most countries, the announced measures cost more than 0.5 percent of GDP (excluding existing subsidies).
- Low-income developing countries have incurred the highest relative cost for new food-related measures.
- Median number of measures announced:2 31
- Many emerging market economies and low-income developing countries have been managing surging spreads in 2022; the median spread for low-income developing countries has increased over 50 percent in the past year.
- Interest expense relative to GDP is projected to rise over the coming years even as debt stabilizes.
- Almost 60 percent of the lowest-income economies are already in or at high risk of debt distress, highlighting the need for a robust Common Framework for debt relief.
- The global economy is slowing amid continued tight financing conditions; a sharp downturn would further accentuate trade-offs among demand management, debt stabilization, protection of vulnerable populations, and investment for the future.

### Fiscal Policy Needs to Adjust
- Defining a consistent medium-term policy framework for the postpandemic world is crucial.
- Relying on repeated inflation surprises to reduce public debt is not a viable strategy and will lead to spending pressures (for example, wages and cost of services).
- Reducing deficits, as many advanced and emerging markets are projected to do, is necessary to help tackle inflation and address debt vulnerabilities.
- Fiscal consolidation sends a powerful signal that policymakers are aligned in their fight against inflation, which, in turn, would reduce the size of required policy rate increases and keep debt servicing costs lower than otherwise.
- Many countries are revamping their fiscal rules to anchor policies.
- Gradual and steady fiscal tightening is less disruptive than an abrupt fiscal pullback brought on by loss of market confidence.
- Prioritization is vital: top priorities are to ensure everyone has access to affordable food and to protect low-income households from rising inflation.
- Faced with long-lasting supply shocks and broad-based inflation, attempts to limit price increases through price controls, subsidies, or tax cuts will be costly to the budget and ultimately ineffective.
- Recommended approach:
  - Allow prices to adjust and provide temporary targeted cash transfers to the most vulnerable.
  - Preserve price signals to promote energy conservation and encourage private investment in renewables.
  - Safeguard public investment in critical areas.
  - Raise additional revenues where necessary and contain the growth of other expenditures, including public wages.
  - In countries with fiscal space and where inflation is under control, automatic stabilizers should operate fully.

### Helping People Bounce Back
- Government policies foster resilience by helping households and firms recover from or adjust to adversity.
- Advanced economies deployed swift and forceful fiscal actions during the COVID-19 pandemic that laid the foundation for a quick bounceback, but these measures involved fiscal costs and risks.
- Fiscal responses were more diverse among emerging markets and developing economies, with many financially constrained throughout the pandemic.
- Building a resilient society requires government actions to protect households and firms against large losses of real income and employment and actions in intertwined areas such as health care, pandemic preparedness, climate adaptation, and equitable access to opportunities.
- Key lessons and policy tools:
  - Social protection systems help people bounce back from unemployment, sickness, or poverty and can be expanded quickly by leveraging new technologies; they need preparation to be more readily scalable and better targeted.
  - Reducing informality would allow people and firms to benefit from better protection when crises strike.
  - Job-retention schemes provided strong income stabilization and are useful alongside unemployment income support, particularly where layoffs would curb labor productivity.
  - To cushion high food and energy prices, policies should generally avoid price subsidies or controls and instead target support to low-income households through social safety nets; where safety nets are weak, expand social programs (for example, school feeding and public transportation) or provide lump-sum discounts on utilities.
  - For low-income developing countries, food security should be prioritized within the existing fiscal envelope.
  - Exceptional financial support to firms should be restricted to major crisis situations with severe negative externalities; public interventions to support viable firms are risky where governance is weak and capacity to assess or monitor firms’ viability is limited.
  - To manage fiscal risks from measures without immediate budget impact (such as direct lending and public guarantees), governments should focus on transparency, quantification of risks, good governance, and enlisting private sector expertise to assess firms’ viability.

### Preparing Tools and Global Cooperation
- Policymakers can develop prelegislated actions conditional on specified triggers where protection systems and high-frequency indicators are reliable (for example, expanded unemployment insurance following consecutive employment drops).
- Encouraging private-sector resilience through insurance and worker upskilling can reduce the need for government intervention.
- To respond flexibly during adverse events, governments need to gradually build fiscal buffers in normal times (preferably in the context of a medium-term fiscal framework) and preserve debt sustainability and access to financing.
- When inflationary pressures are high, fiscal policy should protect the most vulnerable while pursuing a tightening stance to avoid overburdening monetary policy.
- Domestic measures need to be complemented by global cooperation:
  - Global synergies on pandemic preparedness and vaccine deployment were evident during the pandemic.
  - Investing in climate adaptation can benefit from cooperation among countries.
  - For emerging markets and developing economies at risk of a food crisis and with limited resources or capacity, greater global efforts can provide emergency financing, humanitarian assistance, and unhindered trade.

*International Monetary Fund | October 2022*

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_Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2022/october/english/execsum.pdf_