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IMF warns of ‘vicious cycle’ of COVID damage

By Lachlan Maddock
 — 1 minute read

The world faces a difficult dilemma between preparing for a future crisis and repairing the damage from this one. Getting it wrong could be disastrous. 

COVID-19 has left behind “complex legacies” that will require nations to rebuild their fiscal buffers while simultaneously repairing the growing structural weaknesses in their economies, according to the International Monetary Fund (IMF). 

“Pre-existing inequalities have amplified the adverse impact of the pandemic. And, in turn, COVID-19 has aggravated inequalities. A vicious cycle of inequality could morph into a social and political seismic crack,” wrote Vitor Gaspar, director of the IMF’s fiscal affairs department. 

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The IMF believes preventing that outcome means strengthening social safety nets by increasing the adequacy of benefits, “investing more and investing better” in education and health, and supporting developing nations that face tougher challenges around vaccination and economic recovery. That means more spending – and more spending likely means more taxes.

“COVID-19 recovery contributions and ‘excess’ corporate profits taxes could be considered. Wealth taxes can also be considered if the previous measures are not enough. Emerging market and developing economies should focus on strengthening tax capacity to finance more social spending,” the IMF wrote, adding that “predistributive” policies (which affect incomes before taxes) should also be considered.

But governments will also need to take heed of public expectations, with a high risk that trust in their efforts will deteriorate if support for people and firms is “perceived to be inadequate” or if they fail to allocate efficiency gains to those most affected by COVID-19.

“Past epidemics have undermined trust in political institutions and leaders in a durable manner. In this context, ensuring fair and affordable access to safe and effective COVID-19 vaccines for all – starting with frontline workers and those in high-risk groups – irrespective of national boundaries, is crucial,” the IMF wrote.

 

IMF warns of ‘vicious cycle’ of COVID damage
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