The “unprecedented” government spending to tackle coronavirus and its economic effects will send deficits past their post-financial crisis levels and cause debt levels to balloon, the International Monetary Fund (IMF) said today.
The IMF backed huge levels of spending, however, saying “a sizable increase in deficits this year is necessary and appropriate”. It said government intervention should continue as economies recover to boost growth.
As governments step into prevent a total collapse of their economies, public deficits – the amount spending exceeds revenue – will rise to 9.9 per cent of GDP on average, the IMF predicted in its first estimates of the cost of the virus to governments. This would be higher than after the 2008 financial crisis.
Yet the Fund cautioned: “The size of the impact of Covid-19 on public finances is highly uncertain at this time and will depend not only on the duration of the pandemic but also on whether the economic recovery is swift or the crisis casts a long shadow.”
Yesterday the IMF estimated the global economy will shrink by three per cent in 2020 amid the “Great Lockdown”.
This slowdown, combined with spending measures such as the US’s $2 trillion (£1.7 trillion) spending package and the UK’s wage support scheme, will blow a hole in public finances.
Globally, net public debt will rise to 85.3 per cent of GDP in 2020, the IMF predicted. This is up from 69.4 per cent last year.
The IMF said the UK’s deficit for 2020/21 would be 8.3 per cent of GDP. This is more generous than the country’s budget watchdog, which yesterday said it could reach 14 per cent of national income.
The US’s deficit will balloon to 15.4 per cent of GDP, the IMF predicted. Hard hit Italy will see its deficit reach 8.3 per cent of income.
The huge increase in spending will take the UK’s general government debt to 95.7 per cent of GDP, the IMF said. This is up from 85.4 per cent last year.
In the US, general debt is set to hit a huge 131.1 per cent of GDP. Japan’s debt will top 251.9 per cent of national income.
The IMF backed leaving high levels of spending in place as economies recovered from the coronavirus, suggesting it wants to avoid a return to the austerity that quickly followed 2009.
“As countries contain the pandemic and shutdowns end, broad-based, coordinated fiscal stimulus—depending on countries’ financing constraints—will become a more effective tool to foster the recovery,” its report said.
However, the international lender of last resort cautioned that tough choices would have to be made once economies had completely recovered. “Achieving progress on ensuring debt sustainability will be needed,” it said.