Fiscal policies have provided important emergency aid to individuals and businesses during the COVID-19 pandemic. They are also essential to increase countries’ ability to react to a crisis and assist in the recovery and beyond.
With most countries currently easing back into normal working hours and businesses are slowly opening, a vigorous economic recovery that benefits everyone will depend on improving social protection networks and broad fiscal support, with public investments in health, infrastructure, and measures to combat climate change. Countries with high levels of debt such as Cyprus, will need to strike a balance between short-term fiscal support for the recovery phase and long-term debt sustainability.
The new edition of the Fiscal Monitor report can help authorities decide how to prudently invest in the future for public finances, adopt well-planned discretionary policies to stimulate demand and strengthen social safety nets and aid for the unemployed.
Strengthen Social Safety Nets for People
The pandemic showed how vulnerable people are and served as a warning that action is needed. In response, countries provided temporary assistance to the unemployed and expanded social protection networks to varying degrees. For example, the United States passed laws to offer greater temporary relief to tackle the COVID-19 pandemic compared to Europe, in part because its social safety net is traditionally smaller.
Although part of this temporary relief has a planned timeframe, transforming part of these provisions into more permanent measures and updating tax benefit systems could also automatically stabilise people’s incomes in similar episodes of epidemics and crisis in the future.
But what are the attributes of a good social safety net? These are the three most fundamental:
- Firstly, progressively providing broad coverage and sufficient benefits to vulnerable groups – that is, more generous benefits to the poorest.
- Second, preserving incentives to work and helping beneficiaries to seek employment, obtain medical assistance and find training and capacity building.
- Thirdly, trying to avoid a fragmented and complex web of social protection programs that ends up generating a higher administrative cost and does not benefit people in a fair and consistent manner.
Based on these criteria, governments in advanced economies can improve social safety nets by including more people in existing programs and improving the impact of benefits on people’s lives. In developing and emerging market countries, governments can fill gaps in coverage by extending existing programs and employing other means of service delivery.
Two examples are the mobile phone networks and the provision of goods and services in kind – especially in the areas of health, food and transport – to reach people most in need or who are currently not having their needs met.
Social safety nets can result in better redistribution if a larger portion of the poorest 20% of the population receives more benefits than the richest 20%.
Planned Discretionary Projects & Fiscal Policies
To help companies reinstate workers after the pandemic, governments could plan temporary cuts in payroll taxation to encourage companies to hire. In order to get people to spend, reductions in VAT/GST for a defined period or tools such as food stamps could be used.
Smaller investment projects can be accelerated. More generally, countries could approve in advance in the legislature measures to be triggered automatically in periods of contraction, such as some social benefits and tax exemptions. This would allow people to receive much needed fiscal support more quickly. At the same time, the extent of support depends on the ability of each country to finance these measures.
Investing for the Long-term Future
Quality public investments in health systems are needed to protect people and minimise the risks of future epidemics. Other priorities are infrastructure, green technologies, such as wind and solar energy, and advances in the Sustainable Development Goals in sectors such as education and access to sanitation and drinking water. Additional investment needs in the next 20 years are expected to exceed USD $20 trillion worldwide, at current prices.
Decisions – for example, on whether or not to increase quality public investments – will depend on the needs in specific sectors and their economic and social benefits, the financing capacity and the efficiency of public investment. This last point is crucial for all countries, because one third of the resources allocated to public infrastructure are lost worldwide because of inefficiency and corruption.
In the case of advanced economies with ample space in the budget, such as Singapore and the Netherlands, spending more on public investments is worthwhile, since the value of the resulting assets is likely to be higher than the obligations generated, given the low interest rates.
This, in turn, increases the net worth of the public sector. In the case of countries with reduced room for maneuver in terms of spending, such as Spain and Portugal, it is possible to redirect revenues and expenses to increase investment.
In developing and emerging market economies such as Brazil and South Africa, high debt and increased interest payments require that development be financed prudently and sustainably. These countries must seek to do more with less. Increasing tax revenue in the long run would be crucial for low-income developing countries, such as Nigeria.
Managing a Greater Share of Public Debt Globally
Supporting the restoration of the economy with fiscal tools and managing higher levels of public debt is a delicate balancing act. The pandemic and its economic consequences, as well as the policies adopted to combat them, have contributed to a sharp increase in fiscal deficits and public debt levels.
With the containment of the pandemic and the economic recovery, public debt should stabilise, albeit at higher levels. If the recovery takes longer than expected, the debt dynamics may be more unfavorable. As the pandemic is controlled, countries can support the recovery of their economies already thinking about promoting credible medium-term reform plans.