This Letter IEDI resumes the discussion regarding policies necessary for a sustained GDP recovery in the post-COVID-19 crisis period. This theme has already been dealt with in previous editions from different perspectives, generally summarizing official documents of countries or blocks of countries and publications by international organizations. Examples are: “Europe Post COVID-19: the European Union's recovery plan,” “Brazil after COVID-19: IPEA's proposals,” “Economic Measures for the post lockdown,” “Industry and Sustainability in the Post-Pandemic Era” and “The role of public investment to reactivate the post-COVID-19 economy.”

This time, our analysis is based on the study “Recovering better: expanding the space for fiscal policy,” part of Unctad's Trade and Development Report 2020. The document highlights the countercyclical role of public spending, with suggestions for how economies can structure fiscal policy in response to the COVID-19 shock. Unctad also examined options for expanding fiscal space in developing countries, which face greater external constraints to expanding public spending.

In the institution's assessment, in periods of severe crises and deep uncertainty, such as that of COVID-19, the government is the only agent capable of taking out large loans against future income; as a result, crisis mitigation initiatives and the economic recession have the effect of increasing public debt.

With the pandemic, the public debt-to-GDP ratio will rise worldwide and will not quickly return to the pre-COVID-19 values, according to Unctad. The institution warns that this increase in public debt coefficients tends to be temporary and should not be a cause for panic or apocalyptic scenarios.

The additional public debt incurred to finance a rapid and sustained recovery can be paid off in the near term with the rise in the potential output of the economy, especially if the fiscal expansion is directed to increase investment and productivity. And, even if the expansion proves to be insufficient, the gap may be, according to Unctad, filled by a future tax and/or public expenditure adjustment.

After the 2020 recession, most advanced economies will, due to quantitative easing monetary policy, be in a situation in which the real interest rate (“r”) is lower than the real GDP growth rate (“g”), enabling a targeted and self-sustained fiscal expansion.

As occurred after the 2008–09 international financial crisis, Unctad recalls that this combination of negative real interest rates and positive GDP growth allows governments to run primary deficits and, at the same time, stabilize the net public debt-to-GDP ratio.

Advanced economies without monetary sovereignty, however, may face external constraints to finance the expansion of fiscal space. Even stronger restrictions are likely to be faced by developing countries, which often issue foreign currency-denominated public debt.

Unctad recognizes that, even in those developing countries with significant international reserves, a substantial fiscal expansion may lead to currency depreciation and higher risk premiums. Furthermore, where fixed exchange rates still prevail, the balance of payments constraint could quickly turn into a monetary and fiscal constraint.

It is important, however, says Unctad, that both the magnitude and the composition of the fiscal impulse are planned in such a way as to have the maximum positive impact on income growth, employment and well-being. This can differ substantially depending on the specific circumstances of each country.

In its assessment, fiscal policy in advanced and developing countries can act on five fronts to stimulate economic recovery after the COVID-19 crisis:

• Strengthening public health systems, with the adoption of national or mission-oriented programs;

• Reinforcing the social security system, with the inclusion of informal, self-employed and independent workers;

• Promoting digitalization and public investment in digital inclusion;

• Guaranteeing access to credit for families and small businesses by offering adequate guarantees for both liquidity risk and credit risk;

• Adopting a strategy for investment—public or government-induced—to create jobs, promote social inclusion and combat climate change.

Unctad points out that, in the last four decades, international arrangements and agreements have imposed restrictions on the ability of States to enlarge their fiscal space, as did the international tax competition between countries and the hyper-globalization, which has facilitated greater use of tax havens. These trends were reinforced by market concentration and the spread of global value chains.

Although some of these constraints can be relaxed within existing multilateral agreements, including actions such as the expansion of special drawing rights (SDR) by the International Monetary Fund (IMF), cancellation and relief of sovereign public debt, among others, Unctad advocates more radical reforms of the global economic governance architecture. In its assessment, such reforms should include:

• International cooperation in tax matters, with the introduction of a global minimum effective corporate tax rate;

• Greater transparency and improvement in the exchange of information for tax purposes, through the creation of a global financial register of asset holders, in order to reduce illicit financial flows;

• International governance in extractive industries to avoid a race to the bottom through tax incentives and to allow governments to capture a fair share of natural resource rents;

• Adapting the international tax architecture to the era of digitalization to reverse the growing loss of tax revenue for countries around the world.

The full text is available in Portuguese.