Fiscal Policies for the Recovery from COVID-19

May 6, 2020 |

Fiscal policies have provided large emergency lifelines to people and firms during the COVID-19 pandemic. They are also invaluable to increase a country’s readiness to respond to a crisis and to help with the recovery and beyond.

When the Great Lockdown finally ends, a strong economic recovery that benefits everyone will depend on improved social safety nets and broad-based fiscal support. This includes public investment in health care, infrastructure, and climate change. Countries with high debt levels will have to carefully balance short-term fiscal support for the recovery stage with long-term debt sustainability.

Countries need to invest $20 trillion more over the next 20 years in climate change and other SDGs.

The new Fiscal Monitor helps policymakers choose how to invest for the future in a fiscally prudent way, adopt well-planned discretionary policies to stimulate demand, and enhance social safety nets and unemployment benefits.

Enhance social safety nets for people

The pandemic has shown how vulnerable people are and served as a wakeup call for action.

In response, countries have temporarily extended unemployment benefits and expanded social safety nets to varying degrees. For example, the United States has legislated larger temporary lifelines in response to the COVID-19 pandemic than Europe partly because its social safety net has traditionally been smaller.

While some of these temporary lifelines will expire over time, making parts of these provisions permanent and upgrading the tax-benefits systems can also automatically stabilize people’s incomes in future epidemics and crises.

But what are the attributes of a good social safety net? Three matter the most:

• First, provide broad coverage and adequate benefits to vulnerable groups in a progressive way—that is, more generous benefits to the poorest.
• Second, preserve work incentives and help beneficiaries find jobs, obtain health care, and attend education and training.
• Third, strive to avoid a fragmented, complex web of social protection programs that ends up being more costly to run and not benefiting people in a fair and consistent way.

Against these yardsticks, governments in advanced economies can improve social safety nets by covering more people within existing programs and by improving the impact the benefits have on people’s lives.

In emerging market and developing countries, governments can fill gaps in coverage by expanding existing programs and using other delivery instruments. These include mobile phone networks and in-kind provision of goods and services—especially health, food, and transportation—to reach people most in need or currently left out.

Social safety nets could result in a better redistribution if a larger share of the poorest 20 percent of the population receive more benefits relative to the richest 20 percent of the population.

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AUTHORS:
• Vitor Gaspar, W. Raphael Lam, and Mehdi Raissi

Compliments of the IMF.