Fiscal Policy for an Unprecedented Crisis

IMF Blog, October 14, 2020

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Publication: October 14, 2020; authors: Vitor Gaspar, Paulo Medas, John Ralyea, Elif Ture.
The COVID-19 crisis has caused severe harm to lives, jobs, and businesses.
Governments worldwide implemented fiscal lifelines totaling $12 trillion.
Global public debt rose to an all-time high of close to 100 percent of GDP.
The pandemic is expected to push 80‑90 million people into extreme poverty in 2020 even after additional social assistance.
The October 2020 Fiscal Monitor examines country experiences managing the crisis and outlines policy actions across different pandemic phases.

Primary goal: limit human and economic costs by protecting people and preserving jobs.
Public health measures cited:
- large-scale testing,
- tracing,
- public information campaigns.
Income and employment support measures:
- unemployment benefits and wage subsidies (noted as common in most European economies) helped preserve jobs or living standards,
- cash transfers supported poor, informal workers, and self-employed who lost jobs,
- liquidity support to firms prevented default waves and mass layoffs, particularly important for small-and medium-sized firms that represent a large share of employment.
Responses varied by country access to borrowing and pre-crisis public and private debt levels:
- In advanced economies and some emerging market economies, central bank purchases of government debt helped keep interest rates at historic lows and supported massive fiscal responses.
- In many highly indebted emerging market and low-income economies, limited borrowing space hampered scaling up support, forcing these governments into tough choices.

General guidance as economies reopen under uncertainty:
- Avoid withdrawing exceptional fiscal support too rapidly; make support more selective.
- Avoid impeding necessary sectoral reallocations as activity resumes.
- Shift support gradually from protecting old jobs to getting people back to work:
- reduce job retention programs (wage subsidies),
- reintroduce job search requirements,
- provide training for new skills.
- Help viable but still-vulnerable firms safely reopen.
- With low interest rates and high unemployment, boost public investment—starting with maintenance and ramping up projects—to create jobs and spur growth.
For emerging market and low-income economies with tight financing:
- Deliver more with less by reprioritizing spending and enhancing efficiency.
- Some may need further official financial support and debt relief.
Revenue measures:
- Adopt measures to improve tax compliance.
- Consider higher taxes for more affluent groups and highly profitable firms to finance critical services such as health and social safety nets.

Once the pandemic is under control, address legacies of the crisis (large fiscal deficits and high public debt levels):
- Countries with fiscal space and major scarring (e.g., large long-term unemployment):
- should provide temporary fiscal stimulus while planning for an adjustment over the medium term.
- Countries with high debt levels and less access to financing:
- will also need to adjust over the medium term, striving to protect public investment and transfers to lower-income households.

Policy priorities moving forward:
- Invest in healthcare systems and education.
- Strengthen social safety nets to ensure access to food and other basic goods and services.
- Accelerate transition to a low-carbon and digital economy; carbon pricing should be a key feature because it:
- encourages reduced energy use and shifts to cleaner alternatives,
- generates revenue that can partly support the most vulnerable.
As governments ramp up public investment and fiscal measures to foster recovery, choices will have long-lasting effects:
- Make a decisive push to make economies more inclusive and resilient.
- Curb global warming through green measures that also boost growth and employment.

Related IMF multimedia: IMF Podcasts · Unprecedented Fiscal Response to an Unprecedented Crisis

Source: Fiscal Policy for an Unprecedented Crisis — October 14, 2020; Vitor Gaspar, Paulo Medas, John Ralyea, Elif Ture.