Ending financial support early can crash recovery; IMF

The International Monetary Fund (IMF) has advised governments across the world to continue supporting their economies and remain flexible with their fiscal support as stopping those efforts soon could ruin the path of recovery. 

IMF Fiscal Policy Chief Vitor Gaspar and Chief Economist Gita Gopinath stated in a blog post that Government spending “will need to remain supportive and flexible until a safe and durable exit from the crisis is secured,”

Even with record low-interest rates worldwide, the debt figures are huge while surpassing the size of the global economy. On the other hand, deficits in advanced economies are now five times higher than pre-pandemic estimates for 2020.

The health crisis and the business shutdowns to contain the spread of COVID-19 demanded “a massive fiscal response” of close to $11 trillion to help support households and prevent bankruptcies,” the scholars said.

“But the policy response has also contributed to global public debt reaching its highest level in recorded history, at over 100% of global GDP, in excess of post-World War II peaks.”
And, they cautioned, “we are not out of the woods.”

IMF which has always vouched for reduced government spending is in the unusual position of urging officials to flood their countries with cash while also sounding the warning about pitfalls ahead, especially if cases rebound.

“While the trajectory of public debt could drift up further, an earlier-than-warranted fiscal retrenchment presents an even greater risk of derailing the recovery, with larger future fiscal costs.”
Blog Excerpt

During the days of 2008 global financial crisis, many governments shut down their stimulus programs at the first sign their economies had stabilized, which later led to a slow, sluggish recovery.

Now the “need for continued fiscal support is clear,” Gaspar and Gopinath wrote, but countries also will need to find a way to fund the packages without debt becoming unsustainable. This would include improving tax collection, making taxes more progressive, so those with higher incomes pay more and eliminating subsidies on fuel while adopting revenue measures such as carbon pricing.

In addition, in the face of “profound” transformations of their economies, governments should focus their efforts on sectors that will survive the crisis, rather than those that will shrink, such as air travel, including possibly nationalizing industries temporarily.

“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,” they said.
“Many of the jobs destroyed by the crisis will likely not return.”