Achieving Global Post-Pandemic Recovery

In the recent annual World Bank/International Monetary Fund (IMF) meetings, the Covid-19 pandemic was still top-of-mind, particularly for countries with low vaccination rates.

However, as global finance ministers return to work in their own countries, they should also take a strong and deep look ahead to the post-pandemic world. Those that do will see that only the private sector can lead the economic recovery to achieve sustainable growth and get people back to work. Furthermore, they should begin designing tax reforms for the post-pandemic world that will both promote this recovery and foster trust between taxpayers and governments.

First, the good news: The world learned hard lessons from the 2008–09 financial crisis, allowing it to better address this one. Overall, government crisis responses to the pandemic, including unprecedented fiscal support, were swift and largely effective. Assistance was delivered quickly and, in many instances, targeted well.

Second, many governments today should be able to stabilize debt quickly—if they stop excess spending (other than emergency health spending to fight the pandemic) soon. In sharp contrast to, for instance, concerns about excessive debt levels from pandemic spending, recent research shows that most governments will be able to stabilize debt in the near future. This is true even for those running a fiscal deficit, as many are—there is an average of -3.9% of GDP for emerging markets and -3.7% for advanced economies. But this is only if spending comes under control.

This new information gives governments highly welcome fiscal breathing room, allowing them to shift their focus to planning for recovery. Government and international financial institution responses to the pandemic were essential, but they were intended to be temporary, acting as life vests to confront a once-in-a-century event. Now, as the pandemic recedes (albeit at widely varying rates in different countries), the focus must shift to the private sector.

It is only through economic growth accompanied by spending restraints that governments will be able to reduce their deficits, and the private sector will be key to doing so.

The Private Sector and Inclusive Recovery

Given where the pandemic has done the most damage, private-sector-led recovery should benefit the groups that were disproportionately harmed, including women and low-income individuals. Certain sectors, such as hospitality and travel, were also affected more severely than others. Government assistance can remain targeted here where necessary, such as by raising investment in education, training, and infrastructure to provide these areas with additional support.

In particular, many countries will need to make targeted investments focused on achieving the full potential of women in the economy—a point the World Bank, IMF, and numerous civil society groups have emphasized for years. Today, women’s inclusion is even more urgent and essential due to the pandemic’s disproportionate impact on their economic opportunities. However, new investments should not reduce incentives to return to work or for private sector investment.

The Sustainable Development Goals (SDGs) are another important aspect of inclusive recovery, and finance ministers already know their countries can only achieve them through private-sector-led growth. With up to 255 million jobs lost during the pandemic—four times more than in the 2008–09 financial crisis—private sector investment and hiring are essential to get countries back on the path toward achieving the SDGs.

This also involves investing in developing countries. There are many opportunities for private investment throughout the developing world, and because some investment institutions remain underweight in emerging market investments, the recovery is an opportune time to consider new investments in these countries. This is particularly true now, when certain developing countries may achieve fiscal stability more quickly than some advanced economies if they continue their present course, as new research shows.

Tax Policy as a Driver

Tax policy plays an essential, albeit sometimes hidden, role in helping restore economic growth. Just as businesses are deciding how and when to bring their employees back to the workplace, so too should governments use the end of pandemic stimulus to think deeply about how reforms that target spending toward those who need it most, streamline tax payment, and improve administration, could spur growth.

Just as tax system design changed even as revenue recovered after the 2008–09 financial crisis, governments today have a fresh opportunity to consider the guiding principles of tax policy and build political will for reform. This is a chance to make tax systems more resilient and equitable, as well as reduce administration and compliance costs.

Delayed payment systems and taxpayer relief helped build trust during the pandemic, and transparency and participation in tax policymaking should seek to improve in order to further build trust between taxpayers and governments.

One area in which the pandemic should lead to lasting change is in the digitization of tax administration. This will increase the tax base by improving tax compliance and reducing corruption. With the aid of digitization, paying taxes can be neither difficult nor intimidating.

Digital systems have the power to make payment and accounting easy while also improving transparency, greatly reducing fears of corruption. This tax system digitization should be designed to encompass small and medium-sized businesses as well, encouraging a welcome shift from the informal to the formal sector and widening the legal tax base in some countries.

Even today, 25% of economies still collect less than 20% of GDP in taxes. For countries that are rebuilding their social safety nets, this may mean raising revenues in a difficult political environment—another reason why building trust between governments and taxpayers is essential. Countries should consider reducing distortions in the system, reducing preferences and moving towards neutrality in business taxation.

Similarly, excessive labor tax rates drive workers to the informal sector, depriving governments of revenue and workers of legal protections.

Above all, tax policy must not hinder growth, work, or investment, but in fact support it.

What this means in practice will differ from industry to industry. As Professor Jack Mintz of the University of Calgary wrote back in February 2021, when vaccination efforts were only beginning in some countries, “tax preferences in favor of declining industries make it more difficult to shift resources to those industries with better opportunities, so it is important to distinguish between sectors that have experienced a temporary shock and those that are in structural decline.”

Planning for the Future

The pandemic was a sober reminder of the importance of fiscal resilience. Countries should plan to address future shocks, which will come—sometimes as quickly as the Covid-19 pandemic did. Broadening the tax base generally increases revenues, and it does so in a more sustainable way over the medium and long terms, avoiding a short-term approach. If countries can get their spending and tax policies right today, it will help prepare the world in case of the next crisis.

Thankfully, even as the immense suffering from the pandemic persists, many countries should still be able to achieve fiscal sustainability. The world has done this before: As Professor Mintz noted, following the financial crisis, “[t]he GDP-weighted average tax/GDP ratio rose after 2010, reaching the same level as 2007 by 2015. Thus, much of the recovery in financial balances was achieved through expenditure restraint and economic growth.”

The world should follow the same recipe for growth now. Leaders must take this opportunity to build a better, fairer, and more resilient global system. Solid tax policy is an essential part of a global foundation for sustainable economic growth that will get people back to work and enable economies to recover.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Daniel A. Witt is Founder and President of the International Tax and Investment Center, Washington, D.C.

The author may be contacted at: dwitt@iticnet.org