OECD: Tackling COVID-19, contributing to a global effort: Part 1

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Tax and fiscal policy in response to the coronavirus crisis: Strengthening confidence and resilience.

This report focuses on how tax policy can aid governments in dealing with the COVID-19 crisis. The report finds that governments have taken decisive action to contain and mitigate the spread of the virus and to limit the adverse impacts on their citizens and their economies.

Through various measures,  countries are helping businesses stay afloat, supporting households and helping preserve employment. This readiness to act helps boost confidence. However, further action, with broader and stronger measures, is needed. Policies will need to be adapted to the evolving health and economic challenges. Containment measures may only be removed gradually, so recovery may be uneven.  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 shocks.

The report finds that specific support will be necessary for developing countries, including through international coordination, financial support, and adaptation of tax rules that benefit all countries. Public finances will eventually need to be restored. All options should be explored, including revamping old tools, introducing new ones, and bolstering ongoing efforts to address the international tax challenges posed by the digitalisation of the economy.

Executive summary – Decisive action has been taken to address the health and economic crises in the face of major uncertainty.

The outbreak of COVID-19 is resulting in a health crisis and a drop in economic activity that are without precedent in recent history. Containing and mitigating the spread of the virus has rightly been the first priority of public authorities, to reduce the incidence of the disease, limit the pressure on healthcare systems and prepare for a stronger rebound as mitigation measures are relaxed.

The containment and mitigation measures have had sudden and profound economic impacts. OECD estimates suggest that the containment measures could lead to an initial decline in output between one fifth and one quarter in many economies, with consumer spending falling initially by about one third – these are rough indications that only capture the direct effects of containment in a context of very large uncertainty (OECD, 2020[1]).

Uncertainty about the development of the pandemic and the duration of the efforts needed to contain and mitigate the virus is large. The evolution of the pandemic will also depend on ongoing efforts to expand the capacity to test, track and trace, to improve treatments for those with severe symptoms, and to develop a vaccine.

Many countries have already acted forcefully to limit the economic hardship caused by the direct effects of containment measures.  The focus of economic policy measures has been on providing liquidity support to businesses to help them stay afloat and providing income support to vulnerable households.

Further and coordinated action to preserve economic capacity and protect the most vulnerable is needed. An escalating policy response, with broader and stronger measures, has been required to keep pace with evolving impacts and risks. Multilateral collaboration and coordination are vital to increase the effectiveness of countries’  responses at all stages of the path to recovery and strengthen the global economy’s resilience to future shocks. In this respect, the internationally coordinated G20 Action Plan to deal with COVID-19 can have large benefits, through spill-overs from joint action for the global economy.

Policy adaptation will be key. The focus can shift from support to limit hardship and maintain economic capacity to stimulus for economic recovery as containment and mitigation measures are relaxed. This progression towards recovery will likely not be linear and smooth,  however, with containment and mitigation measures removed only gradually or partially. This might increase the risks of uneven recovery.

Specific support will be necessary for developing countries, which are facing the pandemic with weaker healthcare systems, less favourable conditions to sustain containment, larger informal economies and smaller scope for fiscal and monetary policy. These factors restrict their ability to respond to the health and economic challenges. As such, international coordination, including significant financial support and a willingness to look at how to adapt international standards and instruments to ensure benefits for low income and low capacity countries, will be needed to complement the measures they take domestically.

To be continued … Part 2

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