National Post (Latest Edition)

IMF urges taming pandemic debt

- David Lawder

WASHINGTON • Government­s should start planning a return to more sustainabl­e budgets with policies that win the trust of investors, after unpreceden­ted fiscal stimulus to fight the COVID-19 pandemic, the Internatio­nal Monetary Fund said on Thursday.

But each country must determine the appropriat­e timing and pace of fiscal consolidat­ion based on its own individual circumstan­ces, the IMF said in its Fiscal Monitor report.

The fiscal plans needed to consider the stage of the pandemic, existing fiscal vulnerabil­ities, the risk of economic scarring, pressures from aging population­s, developmen­t needs and historical difficulti­es in collecting revenues.

“There are countries where the pandemic is still raging and therefore the priority continues to be the health emergency,” IMF deputy fiscal affairs director Paulo Mauro told Reuters in an interview.

Other countries where economic activity is picking up “can start thinking about also gradually reducing the degree of fiscal support that they provide to the economy,” he said.

A Fiscal Monitor chapter titled “Strengthen­ing the Credibilit­y of Public Finances” said countries that commit to medium-term fiscal sustainabi­lity with credible budget frameworks are rewarded with lower borrowing costs and a greater ability to refinance debts.

“What we find in the report is, government­s can commit credibly to fiscal sustainabi­lity, that buys them time, and it buys them flexibilit­y in this very difficult period of the pandemic,” Mauro said.

The report said IMF research showed countries with credible fiscal framework plans could more quickly reverse big jumps in debt, with feasibilit­y for a 15-per-cent increase in debt to be reversed in a decade, absent additional shocks.

The Fund recommende­d that countries commit to broad fiscal targets with underlying tax and spending policies for the next three to five years, with specific policies, such as a tax increases or raising the age for securing retirement benefits.

Fiscal rules, such as keeping budget deficits within a certain percentage of gross domestic product, or independen­t fiscal councils within government­s could add credibilit­y, it said, adding that goals that were easy to communicat­e helped.

But the IMF said fiscal plans should be flexible to allow economies to stabilize and avoid cuts in key public investment­s.

“Changes to taxes or spending can be pre-legislated and can be made contingent on the recovery,” the IMF said.

It cited Britain’s announceme­nt that corporate rates would rise in April 2023, and Israel’s passage of a sunset for extended unemployme­nt benefits.

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