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EXECUTIVE SUMMARY

Chapter 1: Fiscal Policies to Address the or in debt distress—financing constraints have been
COVID-19 Pandemic binding. Official support to alleviate such constraints
The COVID-19 pandemic and associated lock- has been overwhelmed by financing needs. Based on
downs have prompted unprecedented fiscal actions the projected fall in per capita incomes, 100–110
that amounted to $11.7 trillion, or close to 12 percent million people globally would be expected to enter
of global GDP, as of September 11, 2020. Half of extreme poverty, reversing the decades-long declining
the fiscal actions consisted of additional spending trend. Additional social assistance—supporting directly
or forgone revenue, including temporary tax cuts, the poor and cushioning the recession—is expected to
and the other half liquidity support, including loans, have a modest impact reflecting limited support and
guarantees, and capital injections by the public sector. capacity constraints in some countries, containing the
This forceful response by governments has saved lives, increase in poverty to 80 million to 90 million people. 
supported vulnerable people and firms, and mitigated With limited fiscal space, countries need to assess
the fallout on economic activity. However, the con- the benefits, costs, and risks of support measures. Early
sequences of the crisis for public finances, combined insights suggest that public health policies that quickly
with the revenue loss from the output contraction, contained the spread of the disease also allowed for an
have been massive. In 2020, government deficits are set earlier and safer reopening, restoration of confidence,
to surge by an average of 9 percent of GDP, and global and economic recovery, reducing overall social and
public debt is projected to approach 100 percent of fiscal costs. Targeted cash transfers were vital for poor
GDP, a record high. Under the baseline assumptions of individuals, who spent them on necessities. Likewise,
a healthy rebound in economic activity and low, stable unemployment benefits supported necessary consump-
interest rates, the global public debt ratio is expected tion for people who lost their jobs. Many policies
to stabilize in 2021, on average, except in China that provided essential support in the short-term have
and the United States. Yet, more needs to be done to longer-term implications. For example, wage subsidies
address rising poverty, unemployment, and inequality preserved employment relationships but may slow labor
and to foster the economic recovery. market reallocation when new vacancies emerge. Tempo-
Chapter 1 of this edition of the Fiscal Monitor rary tax deferrals and cuts have supported liquidity but
reviews the state of public finances across the world risk becoming permanent at the expense of government
in this unprecedented time and examines the scale, revenues. Equity injections have often been necessary to
scope, and effectiveness of fiscal policy responses to prevent bankruptcies, particularly in hard-hit strategic
the COVID-19 crisis. It then offers a roadmap for the firms, but they could delay sectoral reallocation that is
overall fiscal strategy to promote a strong recovery. crucial for the recovery. Direct or guaranteed loans have
Although the global fiscal response has been so far had low take-up, reflecting some success in restor-
unparalleled, the pandemic has laid bare major differ- ing confidence, but also administrative constraints and
ences in the ability of countries to finance emergency conditionality, as well as the private debt overhang.
spending to protect their people. That ability has Fiscal risks are also unprecedented. They stem from
been determined in part by countries’ fiscal space, uncertainty about the course of the pandemic, the shape
and by public and private debt levels, heading into of the recovery, the extent of scarring and the required
the crisis. In many advanced economies and some resource reallocation, the outlook for commodity prices
emerging markets, massive liquidity provision and and global financial conditions, and the contingent
asset purchases by central banks have facilitated fiscal liabilities from implicit and explicit guarantees. It is
expansions. However, in many emerging markets and crucial to ensure the full transparency, good governance,
especially in low-income developing countries—more and costing of all fiscal measures, especially given their
than half of which are at a high risk of debt distress size, exceptional nature, and speed of deployment.

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A Roadmap for Fiscal Policies during the Different Measures to support low-income households—including
Phases of the Pandemic good-quality jobs—will be critical to reducing poverty.
Global efforts to develop and ensure universal access Countries with limited fiscal space and less access to
to an affordable and effective vaccine or treatment are financing should protect public investment and transfers
the highest priority to contain the human, economic, to lower-income households while increasing progressive
and fiscal costs of the pandemic. National actions are taxation and ensuring highly profitable firms are appro-
also vital to address the health crisis, including smart, priately taxed, aiming at a growth-friendly and equitable
well-informed, and localized containment policies. adjustment.
High levels of precautionary savings by households and Policies for the new post-pandemic economy should
limited private investment in an uncertain environ- focus on tackling poverty and inequality to ensure
ment imply that interest rates will remain low for a social peace and sustainable growth, and on building
long time in advanced and some emerging market resilience against future epidemics and other shocks.
economies. These factors provide the scope and moti- This includes policies to ensure that all people have
vation for fiscal policy to remain a crucial and power- access to basic goods (for example, food) and services
ful tool to foster the recovery. Other emerging market (for example, health and education). Finally, reducing
economies and low-income developing countries facing emissions will remain a core long-term challenge after
tighter financing constraints will need to reprioritize the pandemic. This will call for policies to increase
expenditures and deliver more with less by enhancing carbon prices and catalyze investment in low-carbon
efficiency, and will need further official financial sup- technologies.
port and debt relief.
Policymakers need a toolkit of flexible fiscal mea-
sures to navigate lockdowns and tentative reopenings, Chapter 2: Public Investment for the Recovery
and to facilitate structural transformation to the new The immediate focus of governments during the
post-pandemic economy. In the acute outbreak phase, COVID-19 crisis thus far has been to address the
when lockdowns are pervasive, fiscal policies should health emergency and provide lifelines for vulner-
be geared to do whatever it takes to save lives and able households and businesses. Governments now
livelihoods. As lockdowns ease and become more selec- also need to prepare economies for safe and successful
tive, governments should ensure that lifelines are not reopening, design policies to create jobs and boost
withdrawn too rapidly. Improvements in the ability of economic activity, and facilitate the transformation
social protection systems to reach, target, and deliver to more resilient, inclusive, and greener economies.
benefits to vulnerable people should be preserved. Spending on digital infrastructure will be essential to
When health risks diminish and a durable recovery support social distancing and to narrow the digital gap
is foreseeable, support should shift from protecting that exacerbates disparities in access to information,
employee-firm relationships to helping workers find education, and work opportunities.
new jobs, helping viable but still-vulnerable firms Chapter 2 discusses the appropriate role of public
reopen, and supporting structural transformation investment in fostering such a recovery. Before the
toward the post-pandemic economy. COVID-19 crisis, public-investment-to-GDP ratios
When the pandemic is under control through effec- were already declining and the growth in infrastructure
tive vaccines or treatments, governments will need to had not kept up with needs. Priorities include devel-
foster the recovery while addressing the legacies of the oping well-resourced and better-prepared healthcare
crisis—including elevated private and public debt levels, systems, expanding digital infrastructure, and address-
high unemployment, and rising inequality and poverty. ing climate change and environmental protection.
The scope for stimulus or the appropriate pace of fiscal In advanced and some emerging market econo-
adjustment is country-specific, depending especially on mies, where interest rates are near their effective lower
the depth of a country’s recession, how many people bound, scaling up of quality public investment can
are unemployed, and how easy it is to access financing. have a powerful impact on employment and activity,
Countries with fiscal space and major scarring from crowd in private investment, and absorb excess private
the crisis should provide temporary stimulus, including savings without causing a rise in borrowing costs. For
through public investment, as discussed in Chapter 2. many low-income countries and several emerging

xii International Monetary Fund | October 2020

market economies—particularly those borrowing in governments with limited resources face competing
foreign currency—investment is highly constrained by spending priorities.
financing conditions, despite massive needs to attain Empirical estimates based on a cross-country data
the Sustainable Development Goals. In these countries, set and a sample of 400,000 firms show that pub-
policymakers will need to safeguard public investment, lic investment can have a powerful impact on GDP
to the extent compatible with saving lives and liveli- growth and employment during periods of high uncer-
hoods, and enhance its efficiency. Moreover, the crisis tainty—which is a defining feature of the current crisis.
makes a global response even more necessary to avoid For advanced and emerging market economies, the
slipping further behind on the Sustainable Develop- fiscal multiplier peaks at over 2 in two years. Increas-
ment Goals. ing public investment by 1 percent of GDP in these
Even with social distancing, public investment is economies would create 7 million jobs directly, and
feasible and can be delivered quickly if governments between 20 million and 33 million jobs overall when
take four steps: (1) invest right now in maintenance; considering the indirect macroeconomic effects.
(2) review and restart promising projects that were Crowding in private investment is particularly
delayed in preparation or implementation; (3) speed up strong in industries critical for the resolution of the
projects in the pipeline to bring them to fruition within health crisis (communications and transport) or for
the next two years; and (4) start planning immediately the recovery (construction and manufacturing), but
for new projects aligned with postcrisis priorities. it would have to be accompanied by complementary
Strengthened public investment management policies to address high leverage and liquidity con-
practices and governance are essential because delays, straints faced by private firms.
cost overruns, and disappointing projects are common New investments in healthcare, social housing, digi-
and could be more frequent when investment is scaled talization, and environmental protection would lay the
up—the cost of an individual project can increase by foundation for a more resilient and inclusive economy.
10 percent when public investment in the country is Because rates of return on investments in adaptation
high. Satisfying these conditions may not be pos- to climate change are often greater than 100 percent,
sible everywhere. But for countries with easy access to official aid for adaptation is an effective use of public
finance, borrowing to finance public investments of money. Official aid for climate change adaptation
good quality will be an effective strategy because the would have to more than double the $10 billion
global decline in interest rates has set a lower bar for allocated currently to around $25 billion to finance the
investment projects to be beneficial. For countries with public investments required for adaptation to climate
financing constraints, the bar is higher to pass because change in low-income countries.

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