Europe

Friday, July 10, 2020 - 07:30

MNI POLICY: IMF: Don't Stop Fiscal Aid Until Covid 'Exit' Done


By Greg Quinn

(MNI) - Governments must keep fiscal stimulus going through the recovery from the Covid-19 pandemic, while making hard choices about ending support for industries like airlines and fossil fuels facing a long-term reduction in demand, the IMF said Friday.

"Fiscal policy will need to remain supportive and flexible until a safe and durable exit from the crisis is secured," Fiscal Affairs Director Vitor Gaspar and Research Director Gita Gopinath wrote in a blog post.

"It will be necessary to facilitate the transfer of resources from sectors that may permanently shrink, such as air travel, to sectors that will be expanding, such as digital services. Support should move from maintaining jobs to supporting people as they retrain or relocate across sectors. It will be necessary to distinguish illiquid but solvent firms from insolvent ones."

Governments need contingency plans for "recurrent outbreaks" of the virus and "a new generation of automatic stabilizers may be needed," the report said.

U.S. and European officials have sparred about pricey relief programs in part on concern over disincentives to work as stores re-open. But "the need for fiscal action does not end here" even with global public debt reaching a record 101.5% of GDP this year, beating out marks set following World War II, the IMF said.

"While the trajectory of public debt could drift up further in an adverse scenario, an earlier-than-warranted fiscal retrenchment presents an even greater risk of derailing the recovery, with larger future fiscal costs."

Governments can work back to fiscal balance in the medium term with carbon taxes, more progressive tax rates and by cracking down on tax avoidance, the report said.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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