This paper examines the fiscal challenges policymakers across the globe face in the context of COVID-19, in particular the dilemmas around the eventual withdrawal of exceptional state support to economies once vaccination programmes start to bring the pandemic under control. The paper reviews the risks of both premature and delayed policy normalization, and proposes an approach to guide the transition to a post-COVID-19 world in which economic resilience will be paramount.
Although the massive wave of debt-financed spending undertaken by governments over the past year has raised legitimate questions about rising public debt and future inflationary pressures, the paper argues that the right course is to maintain support for economies until the recovery is entrenched. In particular, the withdrawal of emergency measures should be calibrated to the revival in private sector demand, with public investment used as a ‘platform’ for long-term economic modernization.
The paper further makes the case for international policy coordination with the support of the international financial institutions, to ensure the transition does not produce economic imbalances that could imperil a sustainable recovery. It articulates a set of principles to guide fiscal decision-making and proposes that these should inform G7 and G20 finance ministers’ deliberations this year.