WASHINGTON—Governments should start planning a return to more sustainable budgets with policies that win the trust of investors, after unprecedented fiscal stimulus to fight the COVID-19 pandemic, the International Monetary Fund said on Thursday.
But each country must determine the appropriate timing and pace of fiscal consolidation based on its own individual circumstances, the IMF said in its Fiscal Monitor report.
The fiscal plans needed to consider the stage of the pandemic, existing fiscal vulnerabilities, the risk of economic scarring, pressures from aging populations, development needs, and historical difficulties in collecting revenues.
“There are countries where the pandemic is still raging and therefore the priority continues to be the health emergency,” IMF deputy fiscal affairs director Paulo Mauro told Reuters in an interview.
Other countries where economic activity is picking up “can start thinking about also gradually reducing the degree of fiscal support that they provide to the economy,” he said.
A Fiscal Monitor chapter titled “Strengthening the Credibility of Public Finances” said countries that commit to medium-term fiscal sustainability with credible budget frameworks are rewarded with lower borrowing costs and a greater ability to refinance debts.
“What we find in the report is, governments can commit credibly to fiscal sustainability, that buys them time, and it buys them flexibility in this very difficult period of the pandemic,” Mauro said.
The report said IMF research showed countries with credible fiscal framework plans could more quickly reverse big jumps in debt, with feasibility for a 15 percent increase in debt to be reversed in a decade, absent additional shocks.
The Fund recommended that countries commit to broad fiscal targets with underlying tax and spending policies for the next three to five years, with specific policies, such as tax increases or raising the age for securing retirement benefits.
Fiscal rules, such as keeping budget deficits within a certain percentage of gross domestic product, or independent fiscal councils within governments could add credibility, it said, adding that goals that were easy to communicate helped.
But the IMF said fiscal plans should be flexible to allow economies to stabilize and avoid cuts in key public investments.
“Changes to taxes or spending can be pre-legislated and can be made contingent on the recovery,” the IMF said.
It cited Britain’s announcement that corporate rates would rise in April 2023, and Israel’s passage of a sunset for extended unemployment benefits linked to achieving a lower jobless rate.
By David Lawder