Countries looking to soften the blow of the pandemic-related economic recession — projected to be the worst since the Great Depression — should use temporary and targeted fiscal policies, such as tax breaks, according to the IMF.
In its April 14 World Economic Outlook report, the IMF projected that the global economy would significantly shrink by 3 percent in 2020 as a result of the COVID-19 crisis, a major downward revision of 6.3 percentage points from its January 2020 projections.
“This makes the Great Lockdown the worst recession since the Great Depression and far worse than the global financial crisis,” IMF Chief Economist Gita Gopinath said during an April 14 press conference.
If the pandemic wanes in the second half of 2020, and if containment measures are withdrawn, then the world economy is projected to rebound by 5.8 percent in 2021, according to the report. However, that will only be a partial recovery, as GDP is likely to remain below pre-pandemic trends, the IMF added.
As a result, “there is extreme uncertainty” surrounding the projections, since the economic effects of the crisis depend on the unpredictable interactions of many factors, the report says. These include the nature of the coronavirus crisis itself, the effectiveness of containment measures, and changes in spending patterns and consumer behavior.
Policy priorities should include ensuring that the healthcare sector can cope with the pandemic and limiting the effect of the pandemic on economic activity with fiscal measures, the report says.
“The objective of fiscal policy should be twofold: to cushion the impact on the most-exposed households and businesses, and to preserve economic relationships (particularly by reducing firm closures) for the postcrisis era,” the IMF said. “In doing this, specific policies should be large, timely, temporary, and targeted.”
Response packages should lean heavily on such fiscal measures as cash transfers and tax breaks, the report says. Many countries have already introduced “large and timely measures of this sort,” according to the IMF, pointing to countries like Japan, which deferred tax payments for one year.
China and Italy have also temporarily waived tax payments across hard-hit sectors and areas, while Canada has postponed federal tax payments, the report says. Germany and Spain have implemented interest-free tax payment deferrals, while South Africa has offered tax reliefs as well, the IMF added. According to the report, 100 percent of advanced economies and 70 percent of emerging economies have implemented tax policies in response to the COVID-19 pandemic.
Policies that help keep viable companies afloat are likely to decrease the number of bankruptcies and the “scarring effects of firm closures,” which will help normalize economic activity quickly once the pandemic dissipates, the report says.
“Temporary and targeted policies, such as tax relief and wage subsidies, have an important role to play in achieving this goal,” the report notes, adding that many countries have already implemented those types of measures. Indonesia is offering tax breaks to the tourism sector, while the United Kingdom announced a coronavirus job retention scheme, which pays 80 percent of furloughed workers’ monthly salaries up to £2,500 per month.
Once the pandemic is contained, countries should adopt policies to help economic recovery, such as rescinding the temporary and targeted fiscal measures and relying on “strong multilateral cooperation” to roll back tariff and non-tariff barriers to international trade, the report says.
The IMF’s report coincides with the release of an April 14 report from the U.K. Office for Budget Responsibility, which projected the country’s GDP to tumble by 35 percent in the second quarter of 2020. However, the U.K. government’s fiscal and monetary response to the pandemic should help curb long-term economic scarring, the watchdog said.
The report also comes the same day as a virtual G-7 meeting , during which finance ministers and central bank governors continued discussions about their pandemic response. The ministers and governors reaffirmed their “close coordination to fight the pandemic and mitigate its impacts, including by enacting wide-ranging health, economic, and financial stability measures in [their] respective countries,” according to a G-7 chair statement posted on the U.S. Treasury website April 14. The United States holds the G-7 presidency.
“Ministers and governors reiterated their pledge to do whatever is necessary to restore economic growth and protect jobs, businesses, and the resilience of the financial system,” the statement adds.