The IMF has warned that fiscal support will need to remain “supportive and flexible” until the economic recovery is assured despite massive levels of public debt.
Global public debt will soar to more than 100 per cent of GDP – in excess of its post-WWII peak – as governments unleash massive fiscal spending to avoid the worst of the COVID-19 crisis. But in the wake of the worst recession since the 1930s, policymakers will need to spend even more to combat rising inequality and poverty and address structural weaknesses to protect against future shocks.
“The need for fiscal action does not end here, as we are not out of the woods,” the IMF said. “Even as many countries tentatively exit the Great Lockdown, in the absence of a solution to the health crisis, huge uncertainties remain about the path of the recovery.”
Global fiscal spending has so far totalled $11 trillion, but governments should now move from supporting jobs to supporting people as they retrain or relocate from sectors that have been hit hardest by COVID-19 – such as air travel and tourism – to sectors that will expand, including digital services.
“Governments might take further steps, such as using convertible bonds and injecting equity into (or even temporarily nationalising) strategic and systemic firms,” the IMF said. “Many countries will also need to take swift and determined actions to improve legal mechanisms for resolving debt overhang and preventing long-run economic scarring.”
Governments will also need to pursue a “credible medium-term fiscal plan” that improves revenue mobilisation by minimising tax avoidance and encouraging greater efficiency in spending, including by eliminating fossil fuel subsidies.
“Once effective vaccine and therapeutics against COVID-19 are widely available, we will enter a post-COVID world and truly escape the Great Lockdown,” the IMF said. “That will only be possible if international solidarity allows for access to treatment and vaccines for all people, in developed and developing countries alike.
“At that stage, governments should redirect fiscal policy toward resilient, sustainable and inclusive growth.”