Government support vital as countries rush to vaccinate – IMF Blog
The COVID-19 pandemic is accelerating in many countries and uncertainty is exceptionally high. Decisive government actions are needed to ensure rapid and widespread deployment of vaccines, protect the most vulnerable households and otherwise viable businesses, and foster a sustainable and inclusive recovery.
Most countries will have to do more with less, given increasingly tight budget constraints.
Many countries have continued to support people and businesses in the face of the resurgence of infections and the renewal of restrictions, while calibrating their responses to the changing economic situation. the January 2021 Financial Review Update provides an overview of these efforts and describes what more governments can do to achieve a greener, fairer and more sustainable recovery.
Government support has helped individuals and businesses
Global budget support reached nearly $14 trillion at the end of December 2020, up about $2.2 trillion from October 2020. It includes $7.8 trillion in additional spending or (to a lesser extent) measures to forgo revenue and $6 trillion in guarantees, loans, and equity injections (country details here).
This support has varied from country to country depending on the impact of pandemic-related shocks and the ability of governments to borrow. In advanced economies, fiscal measures cover several years (above 4% of GDP in 2021 and beyond). In contrast, support for emerging markets and developing countries has been concentrated upstream, with much of the measures expiring. Combined with the economic contraction which led to lower revenues, this support led to an increase in public debt and deficits. The average public debt in the world approached 98% of GDP at the end of 2020, against 84% projected before the pandemic on the same date.
Advanced economies recorded the largest increases in budget deficits and debt, reflecting both higher spending and lower revenues. In emerging markets, rising deficits are largely explained by lower tax revenues due to the economic downturn. In low-income countries, the fiscal policy response has been more limited, due to financial constraints and less developed social programs. The pandemic is therefore likely to leave a lasting impact, including an increase in poverty and malnutrition, in these countries.
Fiscal support must be available until the recovery is well under way
Global cooperation for the large-scale production and distribution of treatments and vaccines to all countries at low cost is crucial. Immunization is a global public good that saves lives and will ultimately save taxpayers’ money in all countries. The sooner the global pandemic ends, the sooner economies can return to normal and people will need less government support.
Given the unusually high uncertainty, policies should respond flexibly to changing economic and pandemic conditions, as needed and in a differentiated manner. Most countries will have to do more with less, given increasingly tight budget constraints. This means focusing on the hardest hit and most vulnerable, including the poor, women and informal workers, as well as businesses that are likely to remain viable after the crisis or are of systemic importance to the economy. economy.
Many low-income countries will face challenges even after doing their part. They will need additional help, including through grants, concessional financing, extension of the Debt Service Suspension Initiative or, in some cases, debt restructuring. Rapid operationalization of Common framework for the treatment of debt and expanding debtor country eligibility will be essential.
Fiscal policy must enable a green, digital and inclusive transformation of the economy in the post-COVID19 environment. Priorities include:
- Invest in health systems (including vaccinations), education and infrastructure. A coordinated push for green public investment by economies with fiscal space can support global growth. Projects, ideally with private sector participation, should aim to mitigate climate change and facilitate digitalization;
- Help people return to work and change jobs, if necessary, through hiring subsidies, enhanced training and job search programs;
- Strengthen social protection systems to help fight inequality and poverty;
- Rethink tax systems to promote greater equity and provide incentives for environmental protection; and
- Reduce wasteful spending, increase transparency of spending initiatives, and improve governance practices to take full advantage of budget support.
Policymakers will need to strike a balance between providing more support in the short term to ensure a strong recovery and keeping debt manageable in the long term. Developing credible multi-year revenue and expenditure frameworks (including how to strengthen medium-term fiscal positions) will be vital, particularly where debt is high and financing is tight.
In short, governments must win the vaccine race, be flexible in the face of changing economic conditions, and set the stage for a greener, fairer, and more sustainable recovery.