Fiscal Policy for an Uncertain World

IMF Blog, October 13, 2021

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Vaccination has saved lives and helped economic recovery in many countries, but uncertainty remains high amid new virus variants.
The pandemic will leave a lasting mark on inequality, poverty, and government finances, according to the latest Fiscal Monitor referenced in the piece.
With the pandemic, global debt in 2020 jumped by 14 percent to a record high $226 trillion. This figure includes both public and nonfinancial private sector debt.
Public debt now amounts to $88 trillion, a value close to 100 percent of GDP.
In 2021 and 2022, public debt is expected to decline by about 1 percentage point of GDP each year; after that, it should stabilize at about 97 percent of GDP.

Fiscal policy responses differ significantly between and within income groups.
Advanced economies:
- Fiscal policy remains supportive of economic activity and employment.
- Policy is shifting away from pandemic emergency and lifelines toward public investment to facilitate a green and digital transformation.
- Some policies aim to make economies more inclusive; in the United States, for example, some budget proposals aim to reduce inequality and could cut poverty by nearly one-third.
- Large packages announced by the European Union ("Next Generation EU Recovery Plan") and the United States ("American Jobs Plan and American Families Plan") could add a cumulative $4.6 trillion to global GDP between 2021 and 2026 if fully implemented.
Emerging markets and low-income developing countries:
- Face a more challenging outlook as large portions of the population remain unvaccinated.
- The crisis is expected to have long-lasting negative impacts and lead to a reduction in fiscal revenues relative to pre-pandemic trends, especially in low-income developing countries.
- Fiscal support is waning due to tightening financing constraints.
- Governments will need to continue to prioritize health and protect the most vulnerable.
- An estimated 65–75 million more people will fall into poverty at end-2021 than would have been the case without the pandemic.

Primary risks stem from virus variants and low vaccine coverage.
Large debts and government financing needs are additional sources of vulnerability.
Borrowing costs are already increasing as central banks in some emerging market economies have started raising interest rates to stave off inflation.
There is risk of a sudden rise in interest rates in advanced economies, which would put pressure on financing conditions and especially hurt highly indebted and financially fragile countries.
On the positive side, greater efforts to accelerate vaccination globally would increase growth prospects and boost public finances.

Calibrate policies to the pandemic and to economic developments and prospects:
- Support should be unwound gradually.
- Fiscal actions should aim at containing risks to public finances and at preserving price and financial stability.
Prioritize transformation toward a smarter, greener, more resilient, and more inclusive economy:
- Greater investment in physical capital, education, and social safety nets.
- More support for retraining and reallocating workers to new and better jobs.
Gradually increase tax revenues where necessary and improve the efficiency of spending:
- Steps are especially urgent in low-income developing countries given prospects for a persistent fall in revenues that could reduce financing for the Sustainable Development Goals.
Strengthen the credibility of fiscal policy to create room for further short-term support without jeopardizing public credit:
- Emergency spending needs accompanying measures that ensure transparency and accountability.
- Medium-term fiscal frameworks can reassure lenders and lower financing costs.

The IMF’s recent General Allocation of Special Drawing Rights contributes to international liquidity.
The piece notes these effects can be amplified if higher-income economies could channel some of the resources gained through the SDR allocation to low-income developing countries.
The Debt Service Suspension Initiative expires at end-2021; ensuring the effective functioning of the G20 Common Framework to provide debt relief will be essential to helping the world’s poorest and most heavily indebted countries cope with the continued fallout of the COVID-19 crisis.

IMF Blog — "Fiscal Policy for an Uncertain World", Vitor Gaspar, Sandra Lizarazo, Paulo Medas, Roberto Piazza, October 13, 2021