Question

IMF predicts deeper global recession due to coronavirus pandemic

WASHINGTON (Reuters) - The coronavirus pandemic has caused wider and deeper damage to economic activity than first thought, the International Monetary Fund said on Wednesday, prompting the institution to slash its 2020 global output forecasts further.

The IMF said it now expects 2020 global output to shrink by 4.9%, compared with a 3.0% contraction predicted in April, when it used data available as widespread business lockdowns were just getting into full swing.

A recovery in 2021 also will be weaker, with global growth forecast at 5.4% for the year compared to 5.8% in the April forecast. The Fund said, however, that a major new outbreak in 2021 could shrink the year’s growth to a barely perceptible 0.5%.

Although many economies have begun to reopen, the Fund said that the unique characteristics of lockdowns and social distancing have conspired to hit both investment and consumption.

“We are definitely not out of the woods. We have not escaped the Great Lockdown,” IMF Chief Economist Gita Gopinath told a news conference. “Given this tremendous uncertainty, policymakers should remain vigilant.”

The IMF views the current recession as the worst since the 1930s Great Depression, which saw global GDP shrink 10%, but Gopinath said that the $10 trillion in fiscal support and massive easing by central banks had so far prevented large-scale bankruptcies. More support will be needed, she added.

Source: https://www.reuters.com/article/us-health-coronavirus-imf-outlook/imf-predicts-deeper-global-recession-due-to-coronavirus-pandemic-idUSKBN23V1X8

1. Identify the right fiscal policy that should be followed: Expansionary or contractionary
2. Identify the economic phase in which this fiscal policy should be used.
3. List and analyze the two fiscal policy tools that should be used.

Answer 1

1) Fiscal policy is the policy used for government spending and tax policy to influence the path of the economy over time. Expansionary fiscal policy is the policy where government cuts the tax rates and increases the government spending. Contractionary fiscal policy on the other hand is a policy where government raises tax rates and cuts government spending.

In my opinion, Expansionary fiscal policy has to be used. From the past few months, most of businesses have been shut down, people have lost their jobs, employees have been fired, hiring's have been stalled everywhere. In such scenario, how can people pay their taxes? Government has to increase its spending and help out people to recuperate from these losses.

2) When the economic situation and economy is at slack, just like in recession, at this economic phase, this fiscal policy should be used. Through expansionary policy, there can be an increase in the consumption by raising disposable income through cuts in personal income taxes or payroll taxes.

Let's take for example, if there is an increase in the investments by raising the after-tax profits through cuts in business taxes, by increasing government purchases and raising federal grants to state and local governments help in increasing their expenditures on final goods and services, economy can revive back to normalcy.

3) The two fiscal policy tools that can be used here are - government spending and taxation

Increased government spending and reduced taxes are the two fiscal policy tools which might help the economy in this situation.