Wednesday, October 14, 2020

IMF makes the case for public investment in uncertain times

The IMF published a Fiscal Monitor chapter today on "Fiscal Policies to Address the COVID-19 Pandemic". FT's Chris Giles reports that the fund has formalized its reversal on austerity.

"Most advanced economies that can borrow freely will not need to plan for austerity to restore the health of their public finances after the coronavirus pandemic, the IMF has said in a reversal of its advice a decade ago."

Global public debt is likely to hit a record high of 100 percent of GDP in 2020. But government borrowing costs are expected to stay below the economic growth rate, enabling cheap borrowing to offset the weak growth and low tax revenues that the IMF predicts will result from the coronavirus pandemic.

Vitor Gaspar, IMF's Director of Fiscal Affairs, writes

"The overall size and speed of fiscal action [in response to COVID-19] was unprecedented at about $12 trillion globally, contributing to extending critical lifelines to households and firms.

"More than six months into the pandemic, the Fiscal Monitor emphasizes the importance of not pulling the plug of fiscal support too soon, in spite of the high levels of debt prevailing worldwide...


"The Fiscal Monitor makes the case for public investment. The relevant macroeconomic context includes very low interest rates, high precautionary savings, weak private investment, and a gradual erosion of the public capital stock over time. But the novel argument in the Fiscal Monitor relates to uncertainty. Investment multipliers are particularly high when macroeconomic uncertainty is elevated--and uncertainty in the current World Economic Outlook is "unusually large." Under such conditions, public investment acts as a catalyst for private investment to take off."

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