AfDB and IMF warn of risks of premature fiscal consolidation

Through Beatrice M. Laforga, Journalist

Governments of developing economies should avoid premafiscal consolidation for preremove economic scars and raise taxes only after global health the crisis ends, those responsible for The Asian Development Bank (ADB) and the International Monetary Fund (IMF) said.

“Budget normalization needs to be carefully calibrated and implemented in a phased manner,” AfDB President Masatsugu Asakawa told the 54e annual meeting of the multilateral bank Monday evening.

“While many of our DMCs (developing member countries) may be considering reducing Fithis year, countries should keep in mind the lessons learned Filarge-scale consolidation just after the global financial crisis, ”added Asakawa.

Governments around the world introduced massive fiscal stimulus packages at the height of the coronavirus pandemic last year. Some have extended these relief measures to stimulate economic recovery.

The AfDB’s policy database showed that its DMCs deployed a total of $ 3.7 trillion in pandemic relief measures from the onset of the crisis last year through April this year. year.

These included Fimonetary and monetary measures, cash rebates, tax breaks, loan programs, among others.

Some governments, like the Philippines, may soon have to repay the huge debts incurred to finance their response to the pandemic. Budget deficits have skyrocketed as governments have also seen falling incomes amid slowing economic activity.

“Substantial fiscal consolidation is needed to stabilize debt as a whole, especially for emerging market economies, but this will vary from country to country,” Katherine Baer, ​​deputy director of Fiscal AffIMF Air Department, said in the same forum.

Although fiscal consolidation takes time, Baer said governments will need to continue to increase spending to avoid economic scars. Governments will also need to make investments and support critical sectors such as health.

Ms Baer also noted that governments should only consider raising taxes to raise incomes once the global health crisis has subsided.

“There is an urgent need to increase the income of the region as a whole. From a tax policy design perspective, much of the focus will be on increasing income once the pandemic has been brought under control in a manner consistent with inclusive growth, ”she said. declared.

The IMF executive said inclusiveness meant higher taxes would have to focus more on wealthier people since the pandemic has disproportionately affected low-income workers.

For the Philippines, Under Secretary of Finance Gil S. Beltran said in a separate text message that the best time for the country to begin fiscal consolidation “is when the economic recovery resumes.”

Mr Beltran said the consolidation program aims to bring the country’s debt ratio below 40% of gross domestic product (GDP). Details are still being reviewed by the Development Budget Coordination Committee (DBCC).

The Philippines saw its debt-to-GDP ratio reach a 14-year high of 54.5% in 2020, from a record high of 39.6% in 2019, after the government increased borrowing amid the crisis.

AfDB’s Asakawa said governments can now start preparing their fiscal consolidation plans for Finance vulnerabilities, pending the deployment of reforms.

Asakawa said a fiscal consolidation plan should include better resource mobilization to ensure funding for recovery measures.

Even before the pandemic reduced tax collection, he said income generation in most emerging economies in Asia had been low.

He said countries should address key issues in their tax policies, in particular “disproportionate dependence on narrow sources of income, lack of progressivity, limited effefforts to exploit the environment and subnational taxation, as well as excessive and irresponsible tax expenditure measures. “

Ms. Baer, ​​IMF, said countries can work on a medium-term revenue strategy to strengthen their fiscal capacity and help improve revenue administration.

“This approach breaks the focus on short-term tax reforms and emphasizes how the tax system contributes to social and economic development,” she said.

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