The Strategist

IMF: Pandemic spurs debts and deficits

04/09/2021 - 04:22

In the course of fighting the pandemic and its aftermath, governments have approved budget support programmes worth a total of $16 trillion. As a result, budget deficits and national debt levels have grown to unprecedented levels, according to an International Monetary Fund (IMF) review. At the same time, according to the fund's estimates, the use of such stimulus measures allowed to reduce the depth of the global economic decline by three times in 2020 (the global GDP decline was 3.3%).

The average budget deficit in 2020 was 11.7% of GDP in developed countries, 9.8% - in developing countries and 10.8% - globally. The average is expected to fall to 9.2% in 2021. The biggest deficit is projected to be in the US - 15% of GDP (15.8% last year). In the Eurozone, the figure will be 6.7% after 7.6% in 2020. In China and India, the budget deficits will also be substantial - 9.6% and 10% (11.4% and 12.3% last year). In Saudi Arabia, it will drop from 11.1% to 3.8%. The fund notes that in developed countries, the increase in deficits was caused roughly equally by rising costs and falling fees, while in developing countries it was mainly due to a reduction in revenues.

Total global government debt increased to 97.3% of GDP in 2020, 13 percentage points higher than before the pandemic. In 2021, the reduction in the size of the deficits will allow global debt to stabilise at 99% of GDP over the medium term (it will be approximately 120% of GDP in developed countries and 75% in developing countries). By the end of 2021, public debt in the USA will increase from 108.2% to 132.8% compared to 2019, in the eurozone from 84% to 98.2% and in China from 57.3% to 69.6%.

The IMF does not recommend that governments curtail support programmes until they have overcome the consequences of the pandemic, but considers it possible to increase the tax burden. In particular, the fund suggests that countries with stable tax systems should temporarily increase personal income tax for the rich, as well as additional levies for companies whose profits increased sharply during the pandemic (primarily for pharmaceutical and IT companies). In addition, the IMF believes that an international agreement on a minimum level of corporate taxation could also increase levies.