September 28, 2023

IMF warns COVID-19 could lead to “vicious cycle of inequality” that could “morph into social and political seismic crack”

Mr. Vitor Gaspar
Mr. Vitor Gaspar

The International Monetary Fund warned on Wednesday that COVID-19 could lead to “vicious cycle of inequality” that could “morph into social and political seismic crack,” adding that COVID-19 has aggravated inequalities.

“Preexisting inequalities have amplified the adverse impact of the pandemic. And, in turn, COVID-19 has aggravated inequalities,” Vitor Gaspar, the IMF Director of the Fiscal Affairs Department said in the latest Fiscal Monitor Report. “A vicious cycle of inequality could morph into a social and political seismic crack.”

Gaspar said to reduce that risk, countries should tackle inequalities in access to basic public services—health care, education, social safety—and for strengthening redistributive policies.

“That will, in many cases, require substantial increases in tax capacity and improvements in the efficiency of public spending. Such strong demands on the public sector require good government. And the first requirement of good government is transparent and accountable commitment to a fair shot for all,” he said.

The IMF noted that although the response of fiscal policy has been unprecedented in speed and size, with governments using the budget promptly and decisively, and countries announcing $16 trillion in fiscal actions, many people have been left behind. For instance, the pandemic has had a disproportionate effect on poor people, youth, women, minorities, and workers without a college degree or in low-paying jobs.

“At present, the evolution of COVID-19 and its fallout on economic and social developments remain highly uncertain. Policies must remain agile and respond flexibly as the situation may require. The balance between supporting people and firms, in the emergency, and facilitating a resilient, sustainable and inclusive growth through economic transformation should evolve and adapt to the evolution of COVID-19 and of its consequences,” Mr. Gaspar wrote in the Fiscal Monitor Report dubbed “A Fair Shot.”

He said COVID-19 is leaving behind complex legacies that will need to be tackled, including historically high debt levels.

“First, the amount of fiscal support in 2020 was much larger than the historical norm for business cycle fluctuations. That was appropriate because COVID-19 is a health emergency. But these measures were expensive and contributed to reaching historically high debt levels. In a context of historically low interest rates, countries with stronger buffers, better access to finance, or both were able to deploy larger fiscal support.”

“Going forward, rebuilding buffers and dealing with legacies is crucial for resilience in the event of further shocks. Medium-term frameworks and better targeting will be key for building fiscal space and better confronting trade-offs such as providing support now and providing insurance against future emergencies.

“Second, countries are in different stages of COVID-19, economic and labor market conditions differ, structural characteristics—including institutions—are distinct. Hence, fiscal policy must be tailored to country-specific circumstances.”

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