Coronavirus response to push budget deficits above financial crisis levels
Chris Giles in London
People wearing protective masks queue to register as unemployed in Sofia, Bulgaria. Government deficits are rising as the economic toll of coronavirus grows © AFP via Getty Images
The increase in borrowing by governments around the world as a result of the coronavirus pandemic will be “massive”, the IMF said on Wednesday, forecasting that population lockdowns and economic contractions would push budget deficits to well above peak levels during the financial crisis.
Globally, net public debt will rise from 69.4 per cent of national income last year to 85.3 per cent in 2020, the IMF said, raising concerns about the willingness of the private sector to finance governments with chequered records in servicing their borrowings. In its first attempt to quantify the scale of the damage caused to public finances by coronavirus, the fund provisionally forecast that global public deficits will climb by 6.2 percentage points this year to reach 9.9 per cent of national income, topping levels seen in 2008-9.
Despite these concerns, the IMF supported the surge in short-term public borrowing, saying it was necessary to fight the spread of the virus. “Government responses should be swift, concerted, and commensurate with the severity of the health crisis, with fiscal tools taking a prime role,” it said in its annual fiscal monitor.
“The human cost of the pandemic has intensified at an alarming rate, and the impact on output and public finances is projected to be massive.”
For countries that have good access to lenders, the fund recommended that they should initially borrow to finance their health sectors and protect their companies and households from falling revenues and incomes.
Once lockdowns were lifted, even more borrowing would be needed to “facilitate the recovery”, the IMF warned. “As the virus is contained and people return to work, a broad-based fiscal stimulus becomes more effective,” the IMF said.
But, in the longer term, the fund warned that governments would need to implement higher taxes and curb public spending. “Once economies recover, achieving progress on ensuring debt sustainability will be needed,” the IMF said.
The fund forecast that deficits will rise sharply across the world. In the US, the public sector deficit will surge from 5.8 per cent of national income in 2019 to 15.4 per cent this year with net public debt rising from 84 per cent of national income to 107 per cent, it projected.
Deficits are likely to rise towards 10 per cent of gross domestic product across the eurozone and net debt-to-GDP ratios will balloon in all countries, the fund said — and that could widen the stark differences between eurozone countries’ budget positions that have caused so much political tension in the bloc in the past.
Germany’s net debt is expected to rise by 7.9 percentage points to the relatively low level of 49.2 per cent of GDP but in Italy net debt will rise by 19.6 percentage points to 142.7 per cent of GDP, the fund said, reflecting the country’s deeper downturn and greater loss of tax revenues.
The IMF noted that many European countries had not loosened their budgets as much as the US, although they benefited from larger automatic measures to increase spending in a downturn, such as subsidies to furlough workers.
Interest rates on government debt are at historically low levels across major advanced economies, supported by central banks’ purchases of significant quantities of bonds in an attempt to maintain supportive financial conditions.
Emerging economies face a higher cost of servicing their debt, although they generally have much lower levels of borrowing in relation to the size of their economies, and any rise in borrowing costs could fuel capital flight — a “concerning” outlook, the fund warned.
There is a high risk of “an abrupt worsening in financing conditions”, it said.
Countries in this position should do what they can to prioritise health expenditure while seeking to safeguard other services, the IMF recommended.
In low-income developing countries, the average interest bill on government debt stood at 20 per cent of tax revenues in 2019.
The IMF expects this to rise to more than 30 per cent of revenues this year, highlighting the financial squeeze many governments are facing.
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