Tailoring Government Support
IMF Blog, April 7, 2021
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- Authors: Vitor Gaspar, Paolo Mauro, Raphael Lam, Mehdi Raissi
- Published: April 7, 2021
Overview
- Authors: Vitor Gaspar, Paolo Mauro, Raphael Lam, Mehdi Raissi
- Date: April 7, 2021
- Central premise: The race to vaccinate against COVID-19 continues, but the pace of inoculation varies widely across countries, with access unavailable to many. Global cooperation must be stepped up to produce and distribute vaccines to all countries at affordable costs. The sooner vaccinations curb the pandemic, the faster economies can return to normal.
- Key forensic claim: If the global pandemic is controlled via vaccination, the resulting stronger economic growth would yield more than $1 trillion in additional tax revenues in advanced economies by 2025—and save more in fiscal support measures. The COVID-19 vaccination will thus more than pay for itself, providing excellent value for the public money invested in it.
Varying degrees of fiscal support and macro outcomes
- Fiscal response in the first year of COVID-19:
- Fiscal policy reacted quickly and forcefully to the health emergency; lifelines saved lives and protected livelihoods.
- Fiscal support prevented more severe economic contractions and job losses, and eased financial stress when monetary and fiscal policies acted together.
- Differences across country groups:
- Advanced economies: fiscal actions have been sizable and cover several years (6 percent of GDP in 2021), such as those recently approved in the United States and featured in the 2021 budget of the United Kingdom.
- Emerging market and developing countries: fiscal support more limited owing to financing constraints, though deficits rose as tax receipts fell.
- Average overall fiscal deficits as a share of GDP in 2020:
- Advanced economies: 11.7 percent
- Emerging market economies: 9.8 percent
- Low-income developing countries: 5.5 percent
- Public debt and social outcomes:
- Average public debt worldwide approached 97 percent of GDP at the end of 2020 and is expected to stay just below 100 percent of GDP over the medium term.
- Unemployment and extreme poverty have increased significantly; the pandemic risks leaving a deep scar.
Immediate priorities: Targeting support while pandemic persists
- General guidance: Until the pandemic is brought under control, fiscal policy will have to remain flexible and supportive; the need and scope for support varies across sectors and economies and should be tailored to country circumstances.
- Prioritized actions for governments:
- More targeted support to vulnerable households:
- Rationale: The pandemic has had a disproportionately negative effect on poor people, youth, women, minorities, and workers in low-paying jobs and the informal sector.
- Actions: Ensure social protection is available and spending is sustainable by expanding coverage of social safety nets in a cost-effective way (for example, by limiting the leakage of benefits to unintended beneficiaries).
- More focused support to viable firms:
- Risk: If the pandemic persists, widespread corporate insolvencies could destroy millions of jobs, particularly in contact-intensive service sectors and small and medium enterprises.
- Actions: Prevent resource misallocations and limit the rise of nonviable firms by gradually rolling back blanket loans and guarantees, and limiting public support to circumstances with a clear need for intervention.
- Operational recommendation: Partner with the private sector to assess firm viability before providing support to improve targeting and reduce administrative costs.
Setting the stage for an economic transition (medium term)
- Fiscal balance and credibility:
- Policymakers must strike a balance between providing fiscal support now and keeping debt at a manageable level.
- Some countries may need to start rebuilding fiscal buffers; developing credible multiyear frameworks for revenue and spending is vital, especially where debt is high and financing tight.
- Support for low-income countries:
- Many low-income countries will need additional assistance, including through grants, concessional financing, the extension of the Debt Service Suspension Initiative, or, in some cases, debt treatment under the Common Framework.
- Priorities to enable a green, digital, and inclusive transformation:
- Investing in health systems (including expanded vaccinations), education, and infrastructure.
- A coordinated green public investment push by economies that can afford it can foster global growth.
- Projects should mitigate climate change effects and facilitate digitalization, ideally with private-sector participation.
- Helping people get back to work and change jobs, if needed, through hiring subsidies, enhanced training, and job search programs.
- Strengthening social protection systems to counter inequality and poverty, and reinvigorating efforts to achieve the Sustainable Development Goals.
- Reforming domestic and international tax systems to promote greater fairness and protect the environment.
- Near-term option: a temporary COVID-19 recovery contribution levied on high incomes to help meet pandemic-related needs.
- Medium-term priority: bolster revenue collection, especially in in low-income developing countries, to help finance development needs.
- Cutting wasteful spending, strengthening the transparency of spending initiatives, and improving governance practices to reap the full benefits of fiscal support.
Summary judgment
- Governments have gone to exceptional lengths to shore up their economies, but further work is needed to:
- Get ahead of the COVID-19 pandemic through expanded vaccinations and global cooperation;
- Provide flexible yet targeted support now and adjust when a recovery is firmly in place;
- Set the stage for a greener, fairer, and more durable recovery.
Tailoring Government Support — Vitor Gaspar, Paolo Mauro, Raphael Lam, Mehdi Raissi; April 7, 2021.
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