Covid-19 recovery: from government response to private sector-led sustainable growth
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Article summary
Notes from the Civil Society Policy Forum session on 29 September on fiscal measures to promote sustainable growth during the longer-term recovery phase.
Governments and IFIs provided critical lifelines to households and businesses during the recession, as COVID-19 caused widespread unemployment, rising poverty, and global economic disruption. With government interventions now receding, this session will focus on fiscal measures to promote sustainable growth during the longer-term recovery phase. As subsidies expire, the tension between raising revenue for debt service and stimulating growth raises the question: What sorts of tax policies should be considered, and which risk stifling growth during its delicate re-emergence? Next-stage recovery strategies and fiscal choices will be analyzed by top economists from academia, the private sector, and regional/international institutions.
- Moderator: Daniel A Witt; International Tax and Investment Center (ITIC); President
- Panelist 1: Gabriel Sterne; Head of Global Strategy Services and Emerging Markets Macro Research; Oxford Economics
- Panelist 2: Dr Manal Abdel Samad, Advisor to the Minister of Finance, Lebanese Republic
- Panelist 3: Mario Mansour; IMF; Deputy Chief of the Tax Policy Division
Gabriel Sterne
- Fiscal issues is perhaps the major issue in terms of long-term Covid impacts. My view is that Covid has not de-railed long-term fiscal sustainability.
- Fiscal spending in Covid has increased debt. 60% debt-to-GDP ratios now for emerging markets, on average. Previously, IMF would consider this a level that required a restructuring, but times have changed. It is societies tolerance of fiscal pain that defines what level of adjustment is sustainable.
- I still have some fears of a stagflation.
- Everyone will have to tighten belts to stabilise debt, but the levels are not too onerous (in general). If there is a stagflation, there could be serious needs for fiscal consolidation from Brazil, South Africa, Turkey, and even China.
- Emerging market (EM) funding conditions will likely remain favourable. Global excess savings could persist for 30 years and, moreover, funding capacity of EM domestic financial systems has rocketed. Average maturities in EMs are also quite long at present. Markets have been providing easy money of late – I think markets will actually tolerate debt levels higher event than the 2021 levels.
- That said, we think some countries will face predicaments. We have developed a scorecard of “fiscal predicament”. El Salvador and Sri Lanka face the most severe of all fiscal predicaments. Among larger economies, Spain, Italy, South Africa, Belgium and Brazil face more severe predicaments.
- What has covid done to the fiscal agenda? If developing economies are to meet their SDGs by 2030 they will need $3 trillion. We have potentially serious shortfalls, and Covid has derailed implementation. IMF is correct to emphasise national ownership of these goals and to call on advanced economies to provide more support. A problem is that tax revenues (as a percentage of GDP) are still very low for developing countries and have remained steady over the last thirty years.
- New taxes may be necessary. EM seem to want greater provision of public services through more progressive taxes.
Dr Manal Abdel Samad
- Why do citizens pay their taxes? I think it is based principally on how governments are perceived to spend them (responsibly/effectively or not). The Middle East sees people complying more with their tax obligations.
- Middle East countries are suffering a severe crisis. The pandemic has increased gender and wealth inequality. Women, globally, have been effected globally. In 2020 women lost more than 64 million jobs. 5% of all women’s jobs lost, compared to 3.9% for men.
- Sudan, Yemen, and Lebanon are suffering from unsustainable debt levels.
- Covid-19 has helped us to realise that tax collection can be done digitally, helping to cut corruption and improve efficiency. E-government and E-taxation.
- We need austerity, but low government trust can be an obstacle.
Mario Mansour
- The impact of C19 on revenues has been asymmetric globally. After 2019, tax revenues dipped globally, apart from Europe. Since the 2008 crisis, revenue levels have not increased above the levels that it was prior to 2008. This suggests debt accumulation, given country measures to respond to the global financial crisis and the pandemic.
- L/MICs have been effected quite a bit in loss of revenue, whereas the advanced economies have not been effected significantly (on average).
- What was the response to the crisis? Governments did pay attention to revenue losses and spent quite a lot. Again, asymmetric consequences across income levels. AEs on average spent 20% of GDP on response to the pandemic. In EMs, spending was about a third of this. In LICs, the average are about 1.5% of GDP.
- These reflect the means available to countries – countries that can expect to raise more money through debt or taxes have responded more forcefully to the crisis than those that cannot.
- If we don’t respond correctly to crises all over the world, it will have global consequences (e.g. migration). Having a country strategy is not good enough.
- The lesson is that the pandemic is a sober reminder that we always need medium term fiscal resilience – being ready for shocks.
- We need to think about the level of revenues and also the composition of the spending response.
- Some countries will have to raise more revenue, in very difficult political environments where citizens’ trust in policymakers has been shaken.
- This is an opportunity to think about what is a good tax system. The question of how taxes are raised. The guiding principles – reducing inequities, thinking of environment (e.g. road tolls) – need to be remembered.
Questions & Answers
Question from Matti Kohonen: A question to the speakers, we measured as civil society that in the developing world 63% of recovery revenues went to the large business sectors, while only 22% went to social protection. Is this ratio similar to what IMF sees? Should we not crate wealth taxes / capital gains taxes to ensure that we can continue the vital social protection programmes?
- Mario: the question is important. It goes to the heart of the distributional consequences of transfers. For example, in the Middle East region it was estimated that 30% of cash transfers is lost to households who do not need it. These are design issues.
- Gabriel: Those are interesting statistics and I don’t really have an answer. What you really care about is the efficiency of the spending – it was hard to be efficient with such short term decisions (think furlough system in the UK). It’s hard, in my opinion, to say if those ratios are appropriate or not. The important point to me, though, is if the payments made have been effective.
Zack Billick: How can we understand the tax implications in Middle East rentier states in terms of responsibilities to its citizens to protect them from the negative effects of COVID?
- Manal: It’s about building a whole system of good governance and accountability. We have to give a greater role to women by investigating in female education. Accountability is definitely an obstacle. In addition to working on tax, we have to work on expenditures.
John Gardner: are there particularly countries that are taking the steps now to recover well in the areas under discussion?
- In the Middle East, indicators of social unrest are at their highest in 10-15 years. What people want more of is transparency. These are political economy issues.
Dr Rakesh: the SDGs are derailed. With restricted markets, how can we ensure competitive business at present?
- Gabriel: there is a decision to be made about the extent that governments need to preserve businesses that are struggling now but may have a positive future. The GDP disappointment over the decade after the global financial crisis was extreme. I think a lessen has been learned in the need for more proactive fiscal work, and being less scared of spooking markets.
Nabil Abdo (Oxfam): It’s easy to talk about confidence/trust in people’s governments. But when we see who evades taxes, it tends to be corporations and the very wealthy. The conversation seems to always be about VAT and other things that hit the poorest more. In Egypt, they postponed capital gains tax, and instead implement a blanket covid tax. Dr. Manal, you saw the collapse in Lebanon. Dr. Mansour, what does the IMF think about the need for austerity?
- On austerity, you can reduce overall spending, whilst increasing spending for those who need it most. The same thing on taxes – we can increase taxes in ways that are progressive. They are all design issues.
