“The crisis is not over, keep spending (wisely)”, urge the experts of the International Monetary Fund (IMF) to the governments. The organism’s economists explain that although deficits have increased significantly this year, they are expected to narrow by more than 5% of GDP next year. “While part of this adjustment reflects that growth is expected to strengthen, the biggest contributor to the improvement in fiscal balances will be the strong withdrawal of discretionary support and relief measures that have been introduced to counter the effects of the crisis “Oya Celasun, Lone Christiansen and Margaux MacDonald comment in an article that summarizes the latest IMF report. These three economists warn that this withdrawal of support takes place (and will take place) at a time when job losses as a result of the crisis are expected to still be considerable, as shown by forecasts on the evolution of the labor market for the short term and that contrast with pre-pandemic trends.
While economies have rallied strongly in the third quarter after the lockdown measures, the IMF warns that they have recently lost traction again, due to the second wave of infections and new lockdown measures. In addition, according to the agency, the recovery in recent months has been quite uneven by sector and by country.
For this reason, the IMF advises maintaining fiscal support. A premature withdrawal of stimuli would cause further damage to people’s lives and increase the likelihood of widespread bankruptcies, which in turn would jeopardize recovery and cause the scars of the crisis to go much deeper. The Fund recommends that, in countries where possible, governments should resist tightening fiscal policy too soon and instead ensure continued support for healthcare, individuals and businesses. As for economies with less fiscal space, it can continue to be justified, they say, prioritizing spending to protect the most vulnerable.
According to the latest IMF report, to the extent that automatic stabilizers are not providing sufficient safety nets during the crisis, support for vulnerable households must be maintained until workers can return to the workforce. In addition, it advocates well-targeted support for viable businesses. And, in this sense, warns countries like Spain to reform the insolvency regime or the debt resolution system to help reduce the presence of zombie companies and accelerate the reallocation of resources such as capital and labor. In addition, regarding employment, he advises the labor reform in Spain to increase the dynamism of the labor market.
Regarding recipes for recovery, the Fund’s economists say that, as the world begins to understand what awaits the world after the global pandemic, policies must be oriented towards the new reality and towards the generation of resilience and resistance, with measures that promote investment and hiring in expanding sectors, as well as retraining and training of the unemployed. In addition, they note that investments to promote decarbonization can not only increase employment in the short term, but can also increase the strength of economies in the future.
But the IMF does not forget that countries must return to the path of fiscal sustainability. And it points out that, among other States, Spain needs adjustments beyond those projected so far. But this budgetary consolidation with a view to the medium term must be combined with the strengthening of the social support network and with the alignment of wages with productivity, in addition to opening markets to competition.
The Fund insists in its latest document that the scars that the pandemic and the crisis will leave on the most vulnerable population must be eliminated. “In addition to ensuring continued support with macroeconomic policies to limit the impact of the crisis on unemployment, strong social safety nets must be guaranteed,” the report warns. And it gives some examples of what has been done in Spain, such as the guarantee of contracts for basic services for people who cannot meet their payment, as well as moratoriums on loans and evictions.
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