Although public debt has swelled to the highest in history, the International Monetary Fund (IMF) warned Friday that cutting stimulus could undermine the recovery and that continuing support as the economic slowdown continues will be “paramount,” according to the IMF’s fiscal policy chief Vitor Gaspar told AFP in an interview.
“The risk of premature withdrawal of fiscal support is the dominant risk,” more so than rising debt levels. In response to lockdown, governments provided “a massive fiscal response” of close to $11 trillion in but a few months to support households and prevent bankruptcies.
This “stronger and faster response” than 2008-2010 resulted in record low interest rates and world record breaking levels of debt. Global public debt will reach “its highest level – as a percentage of GDP – ever recorded in history” as more than 100 percent of global GDP.
The deficits of advanced economies are expected to reach five times higher than pre-pandemic estimates for 2020. The IMF is urging authorities to flood their countries with cash. The IMF’s Gaspar and chief economist Gita Gopinath says government spending “will need to remain supportive and flexible until a safe and durable exit from the crisis is secured.”
They cautioned: “We are not out of the woods.”
Authorities should shore up their finances by improving tax collection by taxing those with higher incomes more, while eliminating subsidies on fuel and adopting revenue measures, such as carbon pricing.
Governments are facing “profound” transformations of their economies as “many of the jobs destroyed by the crisis will likely not return.” Governments should focus on sectors that will survive, rather than those that will shrink, such as air travel.
The IMF officials suggest new stimulus could even entail governments taking equity stakes or even nationalizing industries which would “allow the taxpayer to share the upside” in companies benefiting from government support.