The IMF publication World Economic Outlook for April 2021 notes that the global economic outlook is still uncertain, with potential downside effects from new virus mutations balanced by optimism owing to the vaccines. Global growth is projected to reach 6% in 2021, and 4.4% in 2022. These estimates represent an upward revision compared to those in the October 2020 World Economic Outlook owing to the additional fiscal support in a few large economies, the vaccine-enabled economic recovery expected in the second half of 2021 and the increased ability of economic activity to adapt to times of lockdown or reduced mobility.

Policy Priorities

Countries must adjust their policy responses to the level of the pandemic and the strength of the economic recovery in each country. They need to first focus on finding a way out of the crisis, with the emphasis on health care spending and targeted fiscal support. As economic recovery continues, policy must turn to reducing economic scarring, boosting productive capacity and increasing the incentives for an efficient allocation of resources. The scaling back of support should avoid a sudden cliff-edge by gradually reducing government support for wages and short-term work programs. Attention must be given to the long-term challenges of increasing productivity, setting out improved policy frameworks, and tackling climate change.

International Cooperation

As each country will have a different speed of recovery, policy stances will need to be different. For example, advanced economies may recover more quickly due to wide vaccine coverage. Strong international cooperation is therefore important to ensure that emerging market economies and low-income developing countries can work to reduce the gap in living standards with high-income countries. There must be adequate worldwide vaccine production and distribution at affordable prices, including adequate funding for the COVAX facility.

There must be international cooperation to ensure that countries have adequate access to international liquidity where they need to finance their health, social and infrastructure spending for development to allow them to raise per capita income. International cooperation is also needed to increase efforts to mitigate climate change and to tackle the economic issues surrounding trade and technology and improvement of the rules-based multilateral trading system.

Tax Policy

Countries can generate fiscal space for the spending needed in the recovery by tax measures that raise revenue and improve progressivity. Taxes can be increased for high income individuals and profitable corporations that have been relatively less affected by the crisis. Countries can also close opportunities for domestic corporate tax avoidance, reduce tax expenditures such as exemptions, and strengthen tax administration with the help of digital tools and processes.

Countries whose scope for policy initiatives is limited by high public debt will need to use all available tools to increase tax revenue. In addition to reducing tax breaks these countries could look at improving tax registration procedures and consider the merits of well-designed value-added taxes, combined with greater tax progressivity and reduction of excessive subsidies.

In addition to these national tax changes there will be a continuing need for international cooperation to limit tax avoidance through base erosion and profit shifting and to tackle tax evasion.