COVID, UI and Fiscal Policy – Enhancing automatic stabilizers, especially improving unemployment benefit systems and social safety nets, can protect household incomes FMI says

This chapter argues that fiscal policies are at the forefront of facilitating an economic recovery from the COVID-19 pandemic once the Great Lockdown ends. Policymakers can achieve this objective with IDEAS: Invest for the future—in health systems, infrastructure, low carbon technologies, education, and research; adopt well-planned Discretionary policies that can be deployed quickly; and Enhance Automatic Stabilizers, which are built-in budgetary tax and spending measures that automatically stabilize incomes and consumption. Importantly, improving unemployment benefit systems and social safety nets can protect household incomes from adverse shocks and strengthen resilience against future epidemics.

This chapter provides an outline for policymakers to reinvigorate economic growth and counter adverse mac- roeconomic shocks with a framework called IDEAS: Invest for the future—in health systems, infrastructure, low-carbon technologies, education, and research— thereby boosting productivity growth; adopt well- planned Discretionary policies; and Enhance Automatic Stabilizers, including features of the tax and benefit system that stabilize incomes and consumption, such as progressive taxation and unemployment assistance. This framework can inform policies to respond to downturns or weak demand. At the current juncture, governments are actively enhancing the automatic stabilizers by expanding social safety nets to support people during the COVID-19 pandemic. But it is also important to prepare investment plans and discretionary policies more generally, to be deployed as shutdowns end and fiscal stimulus becomes effective and, depending on fiscal space, appropriate.

Low interest rates present an opportunity for high- return public investment—a priority in most countries. Over the past decade, a moderation of capital accu- mulation has slowed economic growth. Modernizing the aging infrastructure in advanced economies and addressing infrastructure needs and other sustainable development goals in emerging market and developing economies are important. In all countries, combating climate change requires investment in mitigation and adaptation. These additional investment needs are likely to exceed $20 trillion globally at current prices, over the next two decades.

For advanced economies with fiscal space, under- taking more investment projects is worthwhile because the value of the resulting assets will likely exceed the liabilities incurred, thus improving the public sector’s net worth. Where fiscal space is limited, it is appropri- ate to reorient revenues and expenditures to increase investment in health systems, infrastructure, and people. In emerging market and developing economies, high debt levels and rising interest expenditures call for financing development in a fiscally responsible way. In low-income developing countries, raising tax revenues would be crucial over the long term. Improving invest- ment management is critical for all countries: one-third of funds for public infrastructure is lost worldwide to inefficiencies.

Discretionary fiscal support during previous downturns often came too late and was not well targeted.To reduce implementation lags and guide expectations, policymakers should act swiftly to establish a pipeline of appraised investment projects now that can be implemented when the health crisis abates, and plan discretionary measures that can be deployed quickly.

Enhancing automatic stabilizers, especially improving unemployment benefit systems and social safety nets, can protect household incomes from adverse shocks and strengthen resilience against epidemics. For example, if Estonia or the United States were to upgrade their benefit systems to the median level of Organisation of Economic Co-operation and Development countries, net incomes of workers who lose their jobs during recessions would fall by one-third less.

Timely extension of the coverage and benefits of social safety nets
(a priority during the pandemic) would support the consumption of vulnerable households. A good example is a guaranteed minimum income scheme that is selective, conditional, and means tested. While many countries are providing greater social assistance to households to fight COVID-19, a premium should be placed on measures that improve tax-benefit systems permanently.

Chosen excerpts by Job Market Monitor. Read the whole story @ Fiscal Monitor – April 2020