IMF: Curb horizontal subsidies - Fiscal spending only for vulnerable households and businesses
The International Monetary Fund is urging governments to target fiscal spending during times of crisis, such as the current one, only to vulnerable households and businesses that have suffered shocks in energy and food prices due to the war in the Middle East, which have caused shocks. In this way, the IMF is trying to protect countries, especially those with higher debts, from further growth.
In challenging times like the current one due to the situation in the Middle East, it is important to have a set of common principles, the Fund urges. The energy crisis is a typical negative supply shock that raises prices, weighs on activity and puts central banks in a difficult position. According to the IMF, fiscal measures have a role to play, but they must be temporary, targeted, timely and tailored.
One of the most important questions the Fund asks about appropriate policies is how long the shock lasts. If it is within historical limits, even if it is large, governments should let domestic prices adjust to international market conditions, it suggests.
Fiscal policy should rely primarily on automatic stabilizers, the report notes. Revenues will be hit as activity falls, while spending will cover the growing need for existing social assistance. For economies that rely on imported energy, higher import prices mean a reduction in real incomes – up to 2% to 3% of GDP in the short term under the current shock. This should be absorbed through lower domestic demand, the report says.
When price shocks are unusually large or disruptive but likely to be temporary, governments may have reason to pursue more active fiscal policy – but only if public finances can withstand them. Even then, any intervention should aim to cushion the adjustment rather than prevent it, the IMF warns.
Price signals play an important role in allocating resources, encouraging their efficient use and preventing shortages. At the same time, higher energy prices can have serious immediate impacts that are felt differently by individuals than by businesses. This means that the objectives of fiscal support and the means for its implementation should reflect this difference, the Fund also suggests.
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