Broader and stronger tax-and-spend measures will be needed to pursue economic recovery from the Covid-19 pandemic, the influential Organisation for Economic Co-operation and Development (OECD) has said.
Among several measures outlined, the OECD said tax policy should focus on “limiting hardship while maintaining the ability for a quick rebound”. This calls for fine tuning and potentially expanding the set of policies already implemented by governments, it said. Moreover, “the costs of policy action may be high, but the costs of inaction are likely to be greater”.
Essential to helping the recovery is protecting housing income, it said, noting that employment remains essential during the containment and mitigation phases.
“There may be a case for extended wage and income support from governments. Particular consideration should also be given to the self-employed and workers in the informal sector,” said the OECD.
As such, it advised that tax supports be targeted at those who need it most, even though that may be administratively costly. Support should focus on the hardest hit sectors, prioritising small- and medium-sized businesses which “may be less able to withstand liquidity and solvency risks”.
In line with projects it is already pursuing, the OECD also said that addressing tax challenges posed by digitalisation of the economy, and ensuring that multinationals pay a minimum level of tax, something which appears anathema to the present Government, will become prominent issues after the crisis.
When the recovery begins, supports will need to continue, said the OECD in its research. “Debt payments may lead to reduced consumption and investment. Supply shocks may also persist and productivity be reduced where containment and mitigation measures are prolonged or only relaxed gradually and partially.”
Subdued tax revenues
The OECD said tax revenues are likely to remain subdued for "a number of years". This tallies with International Monetary Fund research that predicts the global economy will "contract sharply" this year, shrinking by 3 per cent, with the euro zone experiencing an even sharper 7.5 per cent contraction. The organisation suggests that the best way to boost tax revenue in the aftermath of the crisis will be "to support solid growth, including through sufficiently strong and sustained stimulus".
“Where recovery is weak, fiscal action can strengthen it. In this context, multilateral collaboration will be vital for recovery and to strengthen the global economy’s resilience to future shock.”
The OECD noted that all countries have a “direct interest in eradicating the virus and rebuilding economic life throughout the world”.
“This will require a new scale of support for developing countries, where the human cost of the economic crisis will be felt deeper due to weaker healthcare systems, more limited capacity – including limited fiscal space – to cushion impacts, and larger exposure to reduced trade, tourism and lower oil prices.
“This will require significant new external financing, as well as more systematic support to restructure and cancel debts, and rebuild economies and tax systems that can provide universal healthcare will be needed.”
