The fiscal package of anti-crisis support of the economy and population in Ukraine played a role in curbing the pandemic and preventing a deep economic downturn, and its composition generally reflected the positive achievements in the world. Nevertheless, the analysis of the cost of the fiscal package in Ukraine and specific anti-crisis instruments indicates the existence of some problems and deviations.
Since March 2020, to reduce the negative economic and social impact of the coronavirus crisis, many countries around the world have approved fiscal rescue packages aimed at strengthening national healthcare systems, compensating workers’ lost wages and providing assistance to affected firms.
The IMF estimates the total package of fiscal actions in response to COVID-19 at USD 16 trillion globally as of March 2021, or 19% of world GDP in 2020. About USD 10 trillion of this amount is additional spending and tax reliefs, and USD 6 trillion – liquidity support, including government loans, guarantees, and capital injections. According to IMF experts, additional fiscal policy measures on the side of government revenues and spending have mitigated the fall in global growth in 2020 by 2 percentage points since the beginning of the pandemic.
In Ukraine, the cost of the fiscal rescue package, according to IMF estimates, as of March 2021 was 4.3% of GDP, including 3.5% of GDP – additional government spending and tax reliefs, and 0.8% of GDP – fiscal liquidity support measures.
As shown in Fig. 1, the total value of the fiscal package in Ukraine is one and a half times behind the average level in emerging market economies and six times behind the level of advanced economies. Such differences have both objective reasons (narrow fiscal space, limited sources of deficit financing) and subjective ones, in particular, unwillingness of state bodies to provide significant support to business and the population.
IMF experts estimate the cost of fiscal packages in response to the pandemic in advanced economies at 27.7% of GDP. In the structure of fiscal packages, additional government spending and tax measures reach 16.4% of GDP, and fiscal measures to support company liquidity constitute 11.3%(see table). Among large economies, the biggest volumes of fiscal rescue packages were in: Germany – 38.8% of GDP, Italy – 43.7%, Japan – 44.2%, the United Kingdom – 32.4% of GDP, France – 23.3% of GDP, the USA – 27.9% of GDP.
Table – Fiscal measures in response to the COVID-19 pandemic in selected economies, as a % of GDP.
|Countries||Additional spending or foregone revenues||Equity, loans, and guarantees|
|Emerging market economies||4,2||2,5|
In emerging market economies, the anti-crisis fiscal support since the pandemic is estimated at 6.7% of GDP, of which 4.2% of GDP is additional government spending and foregone revenue, and 2.5% of GDP is liquidity support. Among the large emerging markets, the largest deviations from the average are in Brazil (value of the package – 15.0% of GDP), Peru (18.7%), Poland (13.1%), Thailand (12.4%), Turkey (11.3%), Chile (10%), South Africa (9.9% of GDP). At the other end of the spectrum are Mexico (1.8%) and Egypt (1.7% of GDP).
The narrow fiscal space and limited sources of financing deficits in these countries have reduced the strength of fiscal policy in responding to the pandemic. Despite record low global interest rates and higher investor risk appetite, investor demand for short-term government bonds in the national currencies of these countries was low.
In the world, discretionary fiscal policy measures to support the economy and the population, along with a sharp fall in revenues have led to a rapid increase in public debt and government deficits. According to the IMF, in 2020 average overall fiscal deficits as a share of GDP reached 11.7% for advanced economies, 9.8% for emerging market economies.
Under such conditions, global public debt in 2020 increased by 13.6% of GDP and climbed to 97.3% of GDP. At the same time, the debt-to-GDP ratio reached 120.1% in advanced economies and 64.4% of GDP in emerging markets (see Fig. 2). In Ukraine, public debt at the end of 2020 was even lower than the average in emerging market economies and amounted to 60.7% of GDP.
Under the outlined conditions, fiscal risks have become relevant for many countries. They stem from uncertainty about the course of the pandemic, the shape of the recovery, the extent of scarring and the required resource reallocation, the outlook for commodity prices and global financial conditions, and the contingent liabilities from implicit and explicit guarantees.
It is significant that in advanced economies in 2020 the public debt increased by 16.3 percentage points of GDP (given the unprecedented fiscal packages), and in emerging market economies and middle-income countries – by 9.7 percentage points. In Ukraine, public debt for the year increased by 11.9 percentage points of GDP.
A more significant annual increase in public debt in Ukraine compared to the average increase in this group of countries, with a one and a half times lag in the value of the fiscal package in our country from the average in emerging markets, naturally raises questions about the factors of such differences.
The main reason is that last year and this year in Ukraine, budget expenditures not related to anti-crisis support of the population and business are increasing. These include: a) the majority of expenditures on economic activity (increase from 3.9% of GDP in 2019 to 6.2% in 2020); b) expenditures on security, public order, the judiciary and defense (growth from 6.3% of GDP to 6.9%). However, on the other hand, health care spending (from 3.2% of GDP to 4.2%) and transfers to the Pension Fund also grew.
That is, the unprecedented economic and epidemiological crisis has given the “trump card” to the government to increase spending in the desired areas. Some of them (such as large-scale funding for road construction, law enforcement and the judiciary during the COVID-19 crisis) can hardly be called rational and in line with international standards.
In this context, the question of which components of anti-crisis fiscal packages have been sacrificed to political expediency is also relevant. IMF experts in Fiscal Monitor: Policies for the Recovery argue that in the first phase of the epidemic and economic lockdown, fiscal policy should be aimed at saving lives through adequate funding for health services and financial support to affected people and firms. The most appropriate measures of fiscal policy in this phase are wage subsidies, expansion of social protection programs and payments to the unemployed, the provision of tax benefits, subsidized loans, and loan guarantees to enterprises.
Among these instruments in Ukraine, wage subsidies were of symbolic significance; tax benefits for vulnerable firms and households, loan guarantees for viable enterprises. At the same time, paid leave and sick leave for childcare during the closure of schools and kindergartens were not used in Ukraine at all. In addition, the increase in healthcare funding, although amounting to UAH 47 billion, or 1% of GDP, was clearly insufficient to protect the population from the pandemic and provide basic medical services to patients.
According to the IMF recommendations, in the second phase of the gradual reopening of the economy in an uncertain epidemiological situation, the priority of fiscal policy should remain public health and the preservation of key programs of fiscal support to the economy and the population. Such programs should not be removed too fast, given the risks of new waves of infection and prolonged economic downturns. The IMF proposes that countries extend social protection programs to ensure that they are targeted and reach vulnerable populations.
The intensification of public investment in the second phase is mentioned only in the context of mass involvement of the labor force in construction works and with the possibility of implementation in the presence of fiscal space. Unfortunately, Ukraine does not have adequate fiscal space, and the authorities, when initiating the “Great Construction” and “Great Reconstruction” programs, did not set tasks to involve unemployed Ukrainians in public works. IMF experts emphasize that in fiscally constrained economies, priority should be given to protecting the most vulnerable groups and business, as well as to reducing unproductive government spending. Unluckily, in Ukraine, as mentioned above, the priorities were different.
Looking to the future, experts formulate a vision of optimal fiscal policy in the third phase of the fight against the pandemic in achieving positive results of vaccination. In particular, states should promote economic recovery and avoid premature withdrawal of fiscal support. Fiscally constrained economies should prioritize the protection of the most vulnerable and productive public investment.Physical and digital infrastructure and the development of the public healthcare sector should play a key role in defining investment areas. It is also important to reduce non-priority and inefficient spending.
At the same time, Fiscal Monitor for April 2021 states that until the pandemic is brought under control, fiscal policy must ensure adequate financing of health systems, support households and viable companies, and promote economic recovery and growth. Until the pandemic is brought under control globally, fiscal policy must remain flexible and supportive of health care systems, households, viable firms, and the economic recovery. One source of funding for the increased pandemic needs may be a temporary tax on economic recovery, levied on high incomes, profits, and / or accumulated wealth. To help meet increased pandemic-related financing needs, a temporary economic recovery contribution, levied on high incomes, profits or wealth, can be considered.
After 2022, when the vaccination of the population is completed and the stage of economic growth is reached, most experts agree that the world’s fiscal policy priorities should focus on the following:
- investing more and investing better in the development of human capital to improve the educational level and health of the population;
- state’s facilitating the reallocation of labor and capital factors to new sectors of the economy, which received a boost for growth during the pandemic;
- improving the coverage and adequacy of social protections in a cost-effective way (thereby countering the rise of inequality and poverty)
- reforming tax systems aimed at increasing tax deductions for wealthy citizens and highly profitable businesses.
Scientific Director at the Growford Institute, Doctor of Economics Tetiana Bogdan for “Dzerkalo Tyzhnia”.