Global fiscal health

While deep recession, and stimulus spending were one side of the coin during 2020 that saw the covid-19 pandemic unfolding, on the other side, intellectual property rights related to the covid-19 vaccine, increased the gap between rich and poor countries in terms of pace of economic recovery. Moreover, the lack of debt moratorium/relief from creditor countries, and weak multilateral support, all meant increasing fiscal deficits, and in turn a difficult public debt situation overall globally; especially burdensome for developing countries given their narrow tax base traditionally, and difficult balance of payments situation in general.

In the April edition of the flagship ‘Fiscal Monitor’ report by International Monetary Fund (IMF), general government fiscal overall balance, fiscal deficit globally, which was hovering between 3 and 3.6 percent of global GDP during 2016-2019, virtually tripled to 10.8 percent in 2020; where the projection for 2021 stood at 9.2 percent. While the advanced countries with deep pockets could better manage their deficits, it has become a serious challenge for developing countries. In this regard, the Report pointed out that the fiscal deficit for emerging market economies stood at 9.8 percent of their GDP in 2020, while being projected to be 7.7 percent in 2021; indeed, a high level of fiscal deficit.

An impact of ‘oil nationalism’, where oil producing countries, overall, drastically cut oil supply for many months now, could be seen in the likely impact of their quick recovery in terms of fiscal deficit situation at the back of increasing oil revenues, whereby as per the current Fiscal Monitor report the fiscal deficit of oil producing countries decreased from being 8.3 percent in 2020, to being projected at almost half of this at 4.3 percent in 2021. Hence, while the oil producing countries have nowhere near same economic stress, as faced by net oil importing countries like Pakistan, especially in terms of pressures in managing the balance of payments situation, still they overly concerned themselves with managing their own public finances, and not finding a somewhat middle ground, and supporting countries with little foreign exchange cushion, especially at a time when there were significant Covid-19 vaccine-related import payment needs.

In the particular case of Pakistan, while the fiscal deficit was already high in 2019 at 9 percent, at the back of stimulus-related needs, in addition to large payments towards poor performing state-owned enterprises, and energy sector’s high circular debt needs over the years, it continued to remain high at 8 percent in 2020, while in 2021 it is projected to remain elevated at 7.1 percent. Such high fiscal deficits over years, is going to mount further pressure in terms of traditionally high debt repayment needs. According to the Fiscal Monitor report, Pakistan’s general government gross debt, which already stood at a high level of 85.6 percent of GDP in 2019, had further increased to 87.2 percent in 2020, while being projected at 87.7 percent and 83.3 percent in 2021, and 2022, respectively. Given the very modest economic growth rate projected for 2021, after being negative in 2020, tax numbers are likely to remain subdued, while it may make little sense to target the informal sector after the pandemic-related recession had immensely hit employment levels there.

While the IMF suggests such a wealth tax in advanced countries, it makes sense that such a tax could also be planned for those in very high income brackets in developing countries. Pakistan, which is facing immense fiscal challenges, should also envisage levying such a tax on the wealthy, for the time duration of enhanced pandemic-related stimulus needs

Hence, a much improved multilateral spirit is needed to better internalize Pakistan’s stimulus spending needs, a very difficult fiscal deficit and debt repayments situation, and the need for better supporting the country in terms of debt relief/moratorium, and higher financial support with very accommodative conditionalities. Otherwise, it will remain much of a talk, for instance by IMF, which in its recent World Economic Outlook (WEO) report asked countries to remain accommodative in terms of their fiscal and monetary policy stance.

In the absence of such support, developing countries like Pakistan, would have little to contribute to global economic recovery, as the same WEO report highlights in terms of divergent growth scenario and the rising recovery gap between rich, advanced countries and the developing ones. Such support is also important to better enable developing countries make necessary health sector investments during the pandemic, and for following an effective vaccine purchase strategy.

During the current IMF-World Bank spring meetings, greater urgency should be shown to hasten the process of likely release of enhanced SDR allocations, reportedly at $650 billion; given after more than a year into the pandemic, this support is long overdue. Moreover, the IMF has come up with an important suggestion, in the shape of countries applying a temporary wealth tax on the rich, and those that have performed very well during the pandemic in terms of earnings, so as to create an important source for generating finances, which can then be channelled towards meeting pandemic-related needs.

The IMF in its Fiscal Monitor report suggested this tax as follows: ‘Advanced economies can increase progressivity of income taxation and increase reliance on inheritance/gift taxes and property taxation. COVID-19 recovery contributions and “excess” corporate profits taxes could be considered. Wealth taxes can also be considered if the previous measures are not enough. Emerging market and developing economies should focus on strengthening tax capacity to finance more social spending.’

While the IMF suggests such a wealth tax in advanced countries, it makes sense that such a tax could also be planned for those in very high income brackets in developing countries. Pakistan, which is facing immense fiscal challenges, should also envisage levying such a tax on the wealthy, for the time duration of enhanced pandemic-related stimulus needs.

Larry Elliott, who is the economic editor at The Guardian, in his recent article ‘IMF calls for wealth tax to help cover cost of Covid pandemic’ pointed out in this regard ‘Governments should consider levying higher taxes on the income or wealth of the rich to help pay for the enormous cost of tackling the Covid-19 pandemic, the International Monetary Fund has said. Inequality had widened in the year since the virus first hit the global economy, the IMF said, and there was a case for the better off being asked to pay more on a temporary basis to meet crisis-related financial costs.’

Similarly, in a recent Financial Times article ‘IMF proposes ‘solidarity’ tax on pandemic winners and wealthy’ Chris Giles pointed out in this regard ‘High earners and companies that prospered in the coronavirus crisis should pay additional tax to show solidarity with those who were hit hardest by the pandemic, according to the IMF. A temporary tax would help to reduce social inequalities that have been exacerbated by the economic and health crisis of the past year, the fund said in its twice-yearly fiscal monitor on Wednesday. It would also reassure those worst affected that the fight against Covid-19 is a collective endeavour within societies. Vitor Gaspar, the IMF’s head of fiscal affairs, told the Financial Times that a symbolic rise in taxation from those who have prospered over the past year would strengthen social cohesion even if there was not a pressing need to repair the public finances.’