The April 2020 issue of the IMF’s Fiscal Monitor discusses policies to support individuals and businesses through the coronavirus crisis and the resulting economic problems.
The Fiscal Monitor looks at certain temporary and targeted fiscal measures to help individuals and firms in the crisis. The loss of income from lockdowns, quarantines and unemployment will reduce the income of households and firms and also reduce investment by firms. Employees in sectors such as travel, tourism and hospitality services will be particularly affected. Countries or regions that rely on oil revenue, tourism or exports of goods or services will be vulnerable in the crisis.
Emergency measures taken by countries include wage subsidies and transfers; paid sick leave; cash transfers to low income households and temporary increases in unemployment benefits. Governments can also help by expanding tax loss carry-back rules or providing temporary tax relief for the individuals and businesses most affected. Other possible measures include postponing social security contributions and reducing advance tax payments that are based on profits of past periods. To support demand during the crisis governments can introduce special investment allowances for projects taking place in a specified time period, for example projects to provide certain medical equipment; or temporary VAT reductions could be considered.
Government support for liquidity is also important, such as cash flow support through loans and umbrella guarantees. Support in the form of government provision of loans, equity injections and guarantees on business loans is estimated to have reached USD 4.5 trillion globally. These loans and guarantees are similar to measures that were used during the financial crisis.
The IMF Fiscal Monitor emphasises that fiscal measures should be targeted, temporary and progressive, targeted to households for basic needs and to viable businesses to prevent layoffs and exits from supply chains. The measures should be progressive in nature, for example by providing a ceiling on wage subsidies, to ensure that the emphasis is on low income households.
Tax and spending measures must be cost-effective and favour measures linked to employment or improving the tax and benefit systems, such as faster VAT refunds or the use of mobile payments. Measures need to build on existing programs and infrastructure so support can be provided quickly. Additional support can be channelled through the social safety net programs and unemployment benefits can be enhanced by extending their duration, raising the levels of benefit or relaxing the eligibility for benefits.
To address liquidity problems within a short time period a reduction in taxes paid monthly or quarterly is preferable to reducing taxes paid after the end of the fiscal year. Targeted tax incentives can be used to encourage investment in essential goods or services including medical supplies. For example, accelerated depreciation or super-deductions could be available for investment in certain areas. Profit-based incentives are not desirable because they are not linked to the necessary expenditure and reward companies with the highest profits. Targeting can be improved by introducing tax advantages in the worst hit sectors; to firms that experience a decline in sales; or in relation to critical products. In relation to tax administration, eligibility for deferral of tax payments could be linked to the taxpayer’s compliance record and denied to those with high risk of non-compliance.
The weakening in demand now being seen in economies globally would normally require broad-based fiscal support such as general tax cuts and public investments. This is however not currently appropriate because the localised outbreaks and national lockdowns are causing disruption to production processes and supply chains that would not be overcome by fiscal stimulation. The higher healthcare spending and targeted tax and spending measures already represent in themselves sizeable support for the economy. A general fiscal stimulus would be more appropriate after the health crisis becomes less acute. After the health crisis broader country-level policies will therefore be required to ensure sustained economic recovery.
