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IMF: Global debt levels could hamstring eco projects

Author: ICAEW Insights

Published: 25 Oct 2021

The pandemic has made it harder for governments to meet their green goals, says a report from the International Monetary Fund, which warns that tax rises particularly across low income developing countries may be needed to pay for environmentally-friendly policies.

The International Monetary Fund’s (IMF) latest Fiscal Monitor says global levels of public debt – currently amounting to £65trn – will make it more difficult for some countries to justify investing in environmentally friendly projects. “The stark difference across countries in the projected scarring from the pandemic is likely to affect income inequality and poverty, making it more difficult for countries to achieve their UN Sustainable Development Goals,” the report warns.

In response to a decline in tax receipts expected in the wake of the pandemic, the IMF suggests that fiscal policy remains key to addressing the impact of COVID: “This can be achieved through a well-designed menu of value-added and property taxes, progressive income, corporate and capital taxation, and expansion of the base for corporate and personal income taxes.” The IMF says concerns about the distributional impact of these measures can be addressed by strengthening social safety nets. 

In many advanced economies, fiscal policy is shifting toward strengthening economies through a green transition, digital transformation, and other longer-term investments. By contrast, in emerging markets and low-income developing countries, growth is held back by the low availability of vaccines, and governments are shifting expenditures toward addressing pandemic-related priorities. 

In low-income developing countries, reversing some of the damage from the pandemic and moving closer to achieving Sustainable Development Goals will require significantly scaling up spending on human and physical capital in the years ahead while ensuring debt sustainability, the report says. “Mustering the needed resources would, in turn, necessitate reversing the decline in revenues as a share of GDP—which are currently expected to remain below their pre-pandemic levels.” 

In advanced economies, fiscal policy should be designed in a way that contributes to building economies that are more resilient to future shocks, the report recommends. “This requires plotting a medium-term course to rebuild fiscal buffers, tackle the risks from climate change, and improve preparedness to deal with future pandemics, including by investing in the health care sector and funding vaccine research, development, and manufacturing.” 

Deficits are projected to decrease further by almost 3% in 2022 and return to their pre-pandemic levels by 2026. In emerging markets and low-income developing countries, where the fiscal stance is less supportive than in advanced economies, output and tax revenues are not projected to regain their pre-crisis trajectory and the reduction in deficits will occur largely through lower spending.

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