Main central banks of the world have urged governments to put aside concerns about rising debt and continue to spend until the economic recovery from the coronavirus is complete. Some countries, where the question of how to pay for bailout measures is high on the agenda, they are rejecting those appeals. But the International Monetary Fund, historically a proponent of budget constraints, says they are right.
The Fund publishes its most detailed study on the impact of the pandemic on public finances on Wednesday. Chief Economist Gita Gopinath warned Tuesday that a “Long, uneven and uncertain ascent” after the worst recession in generations, with rising poverty and unemployment still high, and said it is too early for policy makers to withdraw support.
That argument was made with increasing urgency by central bankers who were addressing the IMF’s annual meeting this week. The person responsible for Banco Central Europeo, Christine Lagarde, kicked off the digital event by saying the biggest concern is that tax aid to workers and businesses may be phased out too abruptly.
A series of members of the Federal Reserve, led by President Jerome Powell, made the same argument last week regarding the United States, where talks about the next dose of pandemic stimulus have been stalled for months in Congress. Fed members said their own tools, like another round of bond buying, won’t be as effective as public spending.
The message from the most powerful central banks is increasingly clear: There are limits to what monetary policy can do to help in the short term. Tax authorities, who can borrow at low interest rates and have better tools to offer a quick and targeted boost, will have to finish the job.
Powell and Lagarde are rejecting the “myth of the omnipotent central bank” capable of solving any problem in the economy, said Paul Donovan, global chief economist at UBS Wealth Management in London. “They can’t always figure it out,” he said. “This is not a credit crisis. Lowering the cost of credit is not going to stimulate the economy. ”The backdrop is a global rebound that is losing momentum, and the risk that politicians who have already injected about $ 12 trillion in stimulus, according to IMF estimates, Avoid spending more as debt levels hit record highs.
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The tax bailout added 3.7 percentage points to global growth in 2020, according to JPMorgan Chase & Co., preventing the coronavirus crisis from roughly doubling. But JPMorgan economists expect that momentum to become a drag next year, as the stimulus will be drowned out in a repeat of “policy missteps” that hampered recoveries after the 2008 crash.