Global public debt seems to be reaching its highest level in recorded history, in excess of 100% of world’s GDP as the Covid-19 pandemic already prompted an unprecedented fiscal policy response of close to $11tn worldwide.
Even with record low interest rates worldwide, the debt figures are staggering — surpassing the size of the global economy, and deficits in advanced economies five times higher than pre-pandemic estimates for 2020, the International Monetary Fund (IMF) warned recently.
Obviously, the health crisis and the business shutdowns to contain the spread of Covid-19 demanded “a massive fiscal response” to help support households and prevent bankruptcies, IMF noted.
According to the Fiscal Monitor database of country fiscal measures in response to the Covid-19 pandemic, total global fiscal support so far has been split almost evenly between above-the-line – measures with a direct effect on revenue and expenditure such as deferral of taxes and cash transfers– and below-the-line support, which includes public sector loans, equity injections and government guarantees.
The need for fiscal action does not end here, as the “world is not out of the woods” yet, IMF noted.
Even as many countries tentatively exit the ‘Great Lockdown’, in the absence of a solution to the health crisis, huge uncertainties remain about the path of recovery.
The top priority is still public health. Policies that attenuate health risks contribute substantially to the restoration of confidence and trust, thereby helping economic activity and employment and reducing strains on public finances.
And going forward, early and targeted containment procedures will have much more limited economic and fiscal costs, as compared to a general lockdown.
Accurate, timely and comprehensive data on health and socio-economic outcomes are essential to monitor outbreaks and react swiftly to them, and provide confidence to people that future waves of contagion can be handled.
The fiscal policy will need to remain supportive and flexible until a safe and durable exit from the crisis is secured. While the trajectory of public debt could drift up further in an adverse scenario, an earlier-than-warranted fiscal retrenchment presents an even greater risk of derailing the recovery, with larger future fiscal costs.
Policymakers should prepare contingent plans that can be flexibly scaled to manage the health, economic and fiscal risks from recurrent outbreaks.
The crisis, according to IMF will be “transformational”. Many of the jobs destroyed by the crisis will likely not return. It will be necessary to facilitate the transfer of resources from sectors that may permanently shrink, such as air travel, to sectors that will be expanding, such as digital services.
Support should move from maintaining jobs to supporting people as they retrain or relocate across sectors.
Governments might take further steps, such as using convertible bonds and injecting equity into strategic and systemic firms.
Many countries will also need to take swift and determined actions to improve legal mechanisms for resolving debt overhang and preventing long-run economic scarring.
As IMF noted, the “need for continued fiscal support is clear,” but countries also will need to find a way to finance it without debt becoming unsustainable.
