Editorial

The outbreak of COVID-19 has resulted 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 and limit the pressure on healthcare systems.

Most countries have also acted rapidly and forcefully to limit the economic hardship caused by lockdowns and other containment measures. While the size of fiscal packages has varied across countries, most have been significant, and some countries have taken unprecedented action. Initial government responses focused on providing income support to households and liquidity to businesses to help them stay afloat. As the crisis has continued, many countries have expanded their initial fiscal packages. Where lockdowns and other containment measures have been eased, a number of expansionary fiscal policy measures have been implemented or announced to support economic recovery.

Uncertainty looms large, however, and continued policy adaptability will be key. There is already evidence that the recovery will not be a smooth process, with localised re-introductions of lockdowns in some countries, continued movement restrictions and risks of second and subsequent waves of infections. While some degree of stability is usually needed to strengthen confidence, given the uncertainty of the current crisis, policy flexibility and agility may be what is needed to help restore confidence.

Governments should continue to use fiscal tools to provide support to affected businesses and households. Support measures should be kept in place as long as needed to avoid scarring effects and fiscal policy should remain supportive to speed up recovery. That said, governments should make sure that policy responses are adapted: measures should be well targeted and slowly withdrawn when the situation improves.

Once recovery is locked in, governments should shift from crisis management to consideration of structural reforms, but they must be careful not to act prematurely as this could jeopardise recovery. Governments should seize the opportunity to build a greener, more inclusive and more resilient economy. Rather than simply returning to business as usual, the goal should be to “build back better” and address some of the structural weaknesses that the crisis has laid bare.

A central priority should be to accelerate environmental tax reform. Today, taxes on polluting fuels are nowhere near the levels needed to encourage a shift towards clean energy. Seventy percent of energy-related CO2 emissions from advanced and emerging economies are entirely untaxed and some of the most polluting fuels remain among the least taxed. Adjusting taxes, along with state subsidies and investment, will be unavoidable to curb carbon emissions.

Fair burden sharing will also be central going forward. The crisis has shed light on and exacerbated existing inequalities. Low-income earners, women and young people have been hit harder, while part-time, temporary and self-employed workers have accounted for up to half of the workforce in the most severely affected sectors. A number of countries have temporarily expanded sick leave or unemployment benefits to non-standard workers, but consideration should be given to strengthening their social protection in the longer run.

Once countries exit the crisis and economies recover, governments will start looking to restore public finances, but they may not be able to resort to traditional revenue-raising recipes. Raising taxes on labour and consumption, as was done in the wake of the 2008 global financial crisis, may be difficult politically and in many cases not desirable from an equity perspective. Governments will need to find alternative sources of revenues. The taxation of property and personal capital income will have an important role to play, particularly in a context of significant improvements in international tax transparency.

Global cooperation is more important than ever. The crisis has highlighted our collective vulnerability, but also the critical importance of multilateral collaboration. Rising pressure on public finances as well as increased demands for fair burden sharing should provide new impetus for reaching an agreement on digital taxation. Tax cooperation will be even more necessary to prevent tax disputes from turning into trade wars, which would harm recovery at a time when the global economy can least afford it.

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Pascal Saint-Amans

Director, Centre for Tax Policy and Administration

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