IMF warns against cutting spending: it may derail recovery

The International Monetary fund has stated that a spending cut will be detrimental to the world economy, and has urged policymakers worldwide to not consider a curtailment in government expenditures. Expenditure is needed to bring the economy, hitherto at a standstill, back to life. It remains to be seen when the economy will finally stabilize, but the IMF estimates that stabilization will be set into motion by 2021.

IMF warns spending cut

As governments rushed out funding to prevent an economic collapse amid the coronavirus pandemic, global public debt swelled to the highest in history, but the IMF warned Friday that cutting back too soon could undermine the recovery.

Continuing to provide the support as the economic slowdown drags on will be “paramount,” the International Monetary Fund’s fiscal policy chief Vitor Gaspar told AFP in an interview.

IMF warns against spending cut because of great risk

“The risk of premature withdrawal of fiscal support is the dominant risk,” even more than rising debt levels, Gaspar said, noting that the economic recovery from the global financial crisis was slowed by that misstep.

As the health crisis spread and businesses were shuttered worldwide to contain the spread of COVID-19, governments provided “a massive fiscal response” of close to $11 trillion in just a few months to help support households and prevent bankruptcies, a “stronger and faster” response than in 2008-2010.

As a result, even amid record low interest rates, the debt figures are staggering.

Read more: Can IMF please provide the debt relief any quicker?

Global public debt will reach “its highest level — as a percentage of GDP — ever recorded in history,” at over 100 percent of global GDP, Gaspar said.

Deficits in advanced economies are projected to be five times higher than pre-pandemic estimates for 2020.

The Washington-based crisis lender, which historically has always advocated for governments to restrain spending, is in the unusual position of urging authorities to flood their countries with cash while also sounding the warning about pitfalls ahead, especially if there is a renewed spike in virus cases.

With over 12 million cases worldwide and 555,000 deaths, “priority number one” is the health crisis and policies to contain the spread of COVID-19 so that life and the economy can return to normal, Gaspar said.

IMF warns spending cut: says recovery will start by 2021

And as economic activity rebounds, government debt levels should stabilize and begin to fall starting in 2021, he said.

In the wake of the 2008 global financial crisis, many governments shut down their stimulus programs at the first sign their economies had stabilized, which led to a slower, more sluggish recovery.

Now, government spending “will need to remain supportive and flexible until a safe and durable exit from the crisis is secured,” Gaspar said in a blog post co-authored with IMF chief economist Gita Gopinath.

“We are not out of the woods,” they cautioned.

Read more: Gulf economies to nosedive by 7.6% say IMF estimates

But authorities should take steps to shore up their finances including improving tax collection, making taxes more progressive so those with higher incomes pay more, and eliminating subsidies on fuel while adopting revenue measures such as carbon pricing.

In the face of “profound” transformations of their economies, when “many of the jobs destroyed by the crisis will likely not return,” governments should focus their efforts on sectors that will survive, rather than those that will shrink, such as air travel.

That could even include taking equity stakes in or temporarily nationalizing industries, which would “allow the taxpayer to share the upside” in companies benefiting from government support, Gaspar said.

Coronavirus: What its like so far

As of today, the global number of people infected by the Novel Coronavirus and suffering from the associated disease COVID-19 has crossed 12.5 million. There have been more than 560,000 deaths associated with the disease. A statistic to take heart from is the fact that more than 6 million people suffering from COVID-19 have recovered. 

Read more: World economy to shrink more than estimated figures: IMF

COVID-19 associated lockdowns have caused a slowdown in the international economy, with experts saying that it will shrink by as much as 6% this year. Estimates do not show it recovering before 2022. The World Bank has also sounded the alarm over the dismal economic situation that the world finds itself in, and has asked fiscal policy makers the world over to pay special attention to the economic fallout forecasted amid the pandemic.

AFP with additional input by GVS News Desk

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