Fiscal Policies to Contain the Damage from COVID-19

IMF Blog, April 15, 2020

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Fiscal policy is essential to save lives, protect people and firms, and enable a recovery during the pandemic; policymakers should "do whatever it takes but make sure to keep the receipts."
So far, countries have taken fiscal actions amounting to about $8 trillion to contain the pandemic and its damage to the economy.
Emergency lifelines provided globally include:
- higher spending and foregone revenues: $3.3 trillion
- public sector loans and equity injections: $1.8 trillion
- guarantees: $2.7 trillion
The Group of Twenty advanced and emerging economies have taken actions totaling $7 trillion.
Fiscal support also operates through automatic stabilizers such as progressive taxation and unemployment benefits.

Target support to households to ensure access to basic goods and services and to a decent standard of living.
Target support to viable businesses to limit layoffs and bankruptcies and avoid permanent scarring.
Deploy resources in a temporary and efficient way and reflect the costs in multi-year fiscal reports.
Reinforce principles of good governance commensurate with the scale of intervention, including:
- accurate accounting
- frequent, timely and complete disclosure of information
- adoption of procedures to allow for ex-post evaluation and accountability
Assess, monitor, and disclose fiscal risks because not all measures have immediate effects on deficits and debts; for example, government guarantees on business loans may impose future fiscal costs if businesses default.

Governments should finance additional health and emergency services as much as needed.
Challenges:
- Countries with limited health-care capacity cannot adequately scale up resources.
- Borrowing constraints in many emerging market and developing economies require shifting expenditure toward the health sector while safeguarding social protection spending and vital public services (transport, energy, communications).
Global coordination is needed to achieve a universally low cost vaccine and medicine, and to support countries with limited health capacity through aid, medical resources, and concessional emergency financing.
The IMF stands ready to deploy $1 trillion lending capacity to assist member countries, with a focus on low-income developing countries.

Social distancing and closures (schools, restaurants, shopping centers, offices, factories) create large economic costs; people and businesses need large, timely, temporary, and targeted fiscal support.
Capacity to provide lifelines depends on countries' institutional and financial capacity.
Examples of measures by country type:
- Advanced economies: wide range of spending, tax, and liquidity measures supported by strong tax-benefit systems. Examples include extended unemployment benefits (including for the self-employed), payroll tax deferral, and wage subsidies to small and medium enterprises.
- European countries: liquidity lifelines such as affordable loans or guarantees.
- France and Japan: government-funded paid sick and family leave for those unwell, self-isolating, or caring for children during school closings.
- Emerging market and developing economies: face multiple shocks (the pandemic, a steep drop in external demand, plunging commodity prices, capital flight, higher borrowing costs) and have less developed tax-benefit systems; measures include:
- cash transfers using unique identification systems and digital technologies (examples: India, Kenya)
- in-kind provision of food and medicine (example: Bangladesh)
- temporary tax relief for most-affected people and firms (example: China)
- full and timely value-added tax refunds to grant businesses access to cash

As the pandemic abates and the Great Lockdown ends, a globally coordinated, broad-based fiscal stimulus may effectively foster the recovery; coordination enhances effectiveness but must respect cross-country differences in financing capacity.
The pandemic and the Great Lockdown led to increases in debt and deficits beyond those recorded in the global financial crisis.
As the pandemic abates and the economy recovers in 2021, public debt ratios are expected to stabilize at new—higher—levels.
If the adverse scenario in the World Economic Outlook were to materialize, debt levels would be even higher and debt dynamics more unfavorable.
Uncertainty about the timing and circumstances of the eventual recovery reinforces the policy implication: do whatever it takes but make sure to keep the receipts.

Content from "Fiscal Policies to Contain the Damage from COVID-19" (April 15, 2020) by Vitor Gaspar, Mehdi Raissi, Raphael Lam.