The International Monetary Fund (IMF) says unprecedented fiscal support by governments during the Covid-19 pandemic has prevented more severe economic contractions and larger job losses, but risks remain of long-term scarring.
In its Fiscal Monitor report released on Wednesday in Washington, DC., IMF Director of the Fiscal Affairs Department at the IMF, Vitor Gaspar, said such support, along with drops in revenues, has raised government deficits and debt to unprecedented levels across all country income groups.
“The first lesson one year into COVID-19 is that fiscal policy can act timely and decisively. The fiscal policy response was unprecedented in speed and size looking across countries. We also learned that countries with easier access to finance or stronger buffers were able to give more fiscal support. They’re also projected to recover faster,” said Gaspar.
Average overall deficits as a share of Gross Domestic Product (GDP) in 2020 reached 11.7 per cent for advanced economies, 9.8 per cent for emerging market economies, and 5.5 per cent for low-income developing countries. Countries’ ability to scale up spending has diverged.
“So, what have we learned? We’ve learned that fiscal policy is powerful and that sound public finances are crucial in order to enable that power to be used to the fullest,” stressed Gaspar.
Gaspar urged policy makers to balance the risks from large and growing public and private debt with the risks from premature withdrawal of fiscal support, which could slow the recovery.
“In the spring 2021, we emphasize differentiation across countries. Moreover, COVID-19 is fast evolving, as are the consequences from COVID-19. The fiscal policy must stay agile and flexible to respond to this fast-evolving situation,” Gaspar added.
He also warned that the targeting of measures must be improved and tailored to countries’ administrative capacity so that fiscal support can be maintained for the duration of the crisis—considering an uncertain and uneven recovery.
“Moreover, countries are very different in their structures, in their institutions, in their financial capacity and much else. Therefore, policies and policy advice have to be tailored to fit.” Said Gaspar
Gaspar concluded his remarks by emphasizing that global vaccination is urgently needed, and that global inoculation would pay for itself with stronger employment and economic activity, leading to increased tax revenues and sizable savings in fiscal support.
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