Credit: (Photo: NICK OXFORD/REUTERS/Newscom)

Fiscal Policies to Contain the Damage from COVID-19

Vitor Gaspar, W. Raphael Lam, Mehdi Raissi

April 15, 2020

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In times of pandemic, fiscal policy is key to save lives and protect people. Governments have to do whatever it takes. But they must make sure to keep the receipts.

The Fiscal Monitor shows how policymakers can offer emergency lifelines to: save lives; protect people from losing jobs and incomes, and companies from bankruptcies; and enable a recovery. So far, countries have taken fiscal actions amounting to about $8 trillion to contain the pandemic and its damage to the economy.

Governments should do whatever it takes but make sure to keep the receipts.

Emergency lifelines provided globally include higher spending and foregone revenues ($3.3 trillion), public sector loans and equity injections ($1.8 trillion), and guarantees ($2.7 trillion). The Group of Twenty advanced and emerging economies are at the forefront with actions totaling $7 trillion. Fiscal support is also provided by automatic stabilizers—features of the tax and benefit system that stabilize incomes and consumption, such as progressive taxation and unemployment benefits.

Rules of the road

There are three guiding principles countries should follow:

Actions to save lives globally

To save lives, governments should finance additional health and emergency services as much as needed. But this is challenging.

Global coordination will help achieve a universally low cost vaccine and medicine, and support countries with limited health capacity, including through aid, medical resources, and concessional emergency financing. As our Managing Director said in her recent speech, the IMF stands ready to deploy $1 trillion lending capacity to assist member countries, with a focus on low-income developing countries.

Protect livelihoods with targeted fiscal measures

Social distancing necessary to slow the spread of the virus—with closed schools, restaurants, shopping centers, offices, and factories—inevitably carries economic costs. People and businesses need large, timely, temporary, and targeted fiscal support to remain afloat.

Countries’ institutional and financial capacity will influence the size of the lifelines they can offer along with the design and type of measures:

In those cases, in countries like India and Kenya, cash transfers made with the help of unique identification systems and digital technologies, or in-kind provision of food and medicine, such as in Bangladesh, are possible options. China offers temporary tax relief for the most-affected people and firms, including in transportation, tourism, and hospitality services. Full and timely value-added tax refunds can grant businesses access to much needed cash.

Facilitate the recovery with broad-based fiscal stimulus

As the pandemic abates and the Great Lockdown ends, a globally coordinated, broad-based fiscal stimulus may become an effective tool to foster the recovery. Coordination enhances the effectiveness of policy actions. But, at the same time, it has to respect relevant differences across countries, mainly in their financing capacity.

The pandemic and the associated 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.

We do not know enough to foresee the timing and circumstances of the eventual recovery. But in times of emergency, the implication for policymakers is do whatever it takes but make sure to keep the receipts.

Listen to the Podcast by Vitor Gaspar.

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