COVID Budgeting — Fiscal Response and Challenges
An overview of the scale of fiscal response, types of fiscal measures, and budgeting challenges ahead
Note: This post originally appeared on the Building State Capability blog.
Most governments across the world responded to challenges of the COVID-19 pandemic through fiscal and monetary support measures. Coordination and implementation issues aside, these measures have been instrumental in saving lives and livelihoods in the short-term. However, budgeting challenges remain given the massive outlays for the COVID response. In this blog post, we briefly overview the scale of fiscal response, types of fiscal measures, and budgeting challenges ahead.
Distribution
National governments were quick to deliver significant fiscal stimulus packages in response to the economic crisis due to coronavirus lockdowns. These packages varied in size and location (Figure 1). New Zealand had the largest fiscal response of any major country at 19.5% of its GDP (second overall behind Tuvalu at 29%), followed by Singapore (16.1%), Canada (12.5%), and the United States (11.8%).[1] Approximately 70% of countries had a fiscal response of 5% of their GDP or lower (Figure 2). Lesotho had the largest fiscal response among countries in Africa at 10.2% of its GDP, while United Kingdom (9.2%) and Chile (8.4%) had the largest fiscal response in Europe and South America, respectively.
Measures
The fiscal response to COVID has largely centered around relief for taxes and fees, employment incentives, and economic stimulus.[2]
Taxes and fees relief: Most governments have extended filing deadlines and reduced tax rates to provide relief to individuals and businesses. Other measures include:
- Deferring tax installment payments and writing off interest on late payments
- Extending payroll tax exemptions and deferring sales tax remittances
- Suspending increments in government fees and charges
- Increasing corporate tax thresholds and rebates
- Removing import tariffs on critical medical supplies
Employment incentives: Businesses received funds to support payroll while unemployment insurance benefits were enhanced to protect individuals who lost their jobs temporarily or permanently. Measures to support employment include:
- Expanding unemployment insurance coverage and benefits
- Providing wage subsidies to adversely affected businesses
- Suspending compulsory employer contribution to pension funds
- Providing income support to informal workers and other vulnerable groups
- Launching traineeships and skills trainings for public and private sector jobs
Economic stimulus: Direct payments to individuals and loans to businesses in sectors severely hit by COVID lockdowns helped support consumption spending to prevent economic freefall. Measures to stimulate the economy include:
- Supporting industries including aviation, tourism, food service, retail, energy
- Providing credit lines for micro, small, medium, and large enterprises
- Co-investing in new businesses with private investors
- Reducing rent for informal markets and small businesses
- Refinancing existing loans and payments for small businesses
Challenges
Feedback from policy practitioners highlights challenges in the planning process and in creating fiscal space to prepare post-COVID budgets.[3]
Planning amid uncertainty: Pre-COVID assumptions and forecasts lack relevance in preparing budgets for the present and near future. The trajectory of coronavirus cases and associated restrictions will influence additional spending requirements and revenue forecasts. Risks may be better managed by considering multiple scenarios and ensuring frequent revisions to the budget document.[4] Given massive outlays, transparency in the budget-making process is also a concern for which legislative oversight and public engagement are important.
Creating fiscal Space: COVID emergency expenditures have led to sharp rises in fiscal deficits across the world. Both expenditure- and revenue-side measures, including structural reforms, should be considered in devising a strategy to create fiscal space.
- Expenditure-side pressures arise from COVID-related spending and debt repayment obligations. Governments can engage with lending institutions to restructure existing debt and seek loan repayment deferrals. Measures to cut operational expenses and reprioritize capital expenditures will become necessary alongside structural changes such as pension reform.
- Revenue-side pressures arise from declines in revenues from taxes and, in many cases, natural resources. Governments can avail lending facilities from multilateral institutions such as IMF not only as a primary source of funds but also to tap capital markets. Additional revenues may also be raised through measures such as asset monetization and tax reform.
Governments have scrambled to support the health of their people and economies during the COVID crisis. While governments must continue providing emergency support as the COVID crisis evolves, escalating expenditures and revenue constraints pose difficult choices in preparing national and subnational budgets. However, policy practitioners can navigate hurdles in devising budgets by paying attention to the planning process as well as mechanisms for creating fiscal space on the expenditure- and revenue-sides.
