The novel coronavirus (COVID-19) pandemic and associated lockdowns have prompted unprecedented fiscal actions amounting to $11.7trn, or almost 12% of global GDP, as of 11 September 2020, according to the International Monetary Fund (IMF).
The data was released in an IMF report on Wednesday, entitled “Fiscal Monitor: Policies for the Recovery”, during the IMF and World Bank’s annual meetings.
The report noted that half of the worldwide fiscal actions consisted of additional spending or forgone revenue, including temporary tax cuts. The other half went to liquidity support, including loans, guarantees, and capital injections by the public sector.
It praised the forceful response by governments that has saved lives, supported vulnerable people and businesses, whilst also mitigating the fallout of the pandemic on economic activity.
However, the IMF revealed that the consequences of the crisis on public finances, combined with the revenue loss from the output contraction, have been massive.
The report said that in 2020, government deficits are set to surge by an average of 9% of GDP, and global public debt is projected to approach 100% of GDP, a record high.
It added that under the baseline assumptions of a healthy rebound in economic activity and low, stable interest rates, the global public debt ratio is expected to stabilise in 2021, on average, except in China and the US. At the same time, however, more needs to be done to address rising poverty, unemployment, and inequality and to foster the economic recovery.
Governments now also need to prepare economies for safe and successful reopening, design policies to create jobs and boost economic activity, and facilitate the transformation to more resilient, inclusive, and greener economies. Spending on digital infrastructure will be essential to support social distancing, and to narrow the digital gap that exacerbates disparities in access to information, education, and work opportunities.
As economies tentatively reopen, but uncertainty about the course of the pandemic remains, the IMF suggested a fiscal road map, in which governments should ensure that fiscal support is not withdrawn too rapidly.
However, it should become more selective and avoid standing in the way of necessary sectoral reallocations as activity resumes. Support should shift from employee-company relationships to helping workers find new jobs.
Emerging market and low-income economies facing tight financing constraints will need to deliver more with less, by reprioritising spending and enhancing its efficiency. Some may need further official financial support and debt relief.
Governments may also need to consider revenue-enhancing measures, including both increasing tax compliance and the progressivity of taxes on more affluent and less-affected groups. This would also include a set of reforms to modernise business taxation.
The IMF said that the design of corporate income taxes to appropriately capture very high profits of firms in a rapidly changing economy can help finance priority areas such as health and social safety nets. This would include those companies that made windfall profits during the crisis. The taxation system would safeguarding social cohesion during a crisis that has disproportionately hurt the most vulnerable groups.
“Once pandemic become under control, vaccines, and therapies become widely accessible, the goal will be to promote an inclusive and green recovery and structural transformation of the economy, while addressing the legacies of the crisis, including by unwinding government interventions and tackling higher corporate and public debt,” it concluded.