IMF warns countries including the UK are facing a ‘massive’ rise in debt due to the Covid-19 outbreak
Countries including the UK are facing a ‘massive’ rise in debt due to the Covid-19 outbreak, the International Monetary Fund has warned.
The deadly pandemic is forcing governments to spend vast sums on shoring up health services and helping struggling firms and families.
Extra medical spending, and assistance for businesses and individuals, is estimated at £2.6trillion globally. The total being offered in emergency support, including loans and guarantees, is around £6.4trillion, the IMF said in its annual Fiscal Monitor report, which looks at the state of government finances in member countries.
Dark times: The total being offered in emergency support, including loans and guarantees, is around £6.4trillion
‘The human cost of the pandemic has intensified at an alarming rate, and the impact on output and public finances is projected to be massive,’ the report said.
Warning of the ‘worst economic downturn since the Great Depression’, IMF managing director Kristalina Georgieva added: ‘Humanity is facing one of its darkest periods in living memory. Covid-19 is causing tragic loss of life; and the measures needed to fight it have turned our world upside down, affecting billions of people and stopping economies in their tracks.’
Rishi Sunak, the British Chancellor, along with his counterparts overseas, is embarking on vastly increased public spending to combat coronavirus at a time when the Treasury coffers are being depleted.
Tax revenues are falling dramatically as the lockdown brings much of economic life to an emergency stop, meaning companies and individuals are paying less tax because profits and incomes are down. Our national debt stands at nearly £1.8trillion.
However, the Government is able to borrow at cheap interest rates and the national finances are in relatively good shape. Coronavirus will push government deficits beyond their levels in the financial crisis, the IMF said.
The IMF made clear it supports increased public borrowing in order to save lives. However, debt levels were already high and the risk is, that by piling on even more borrowing, they will balloon to dangerous proportions.
Once the immediate crisis is over and lockdowns have ended, the IMF indicated that governments will have to raise taxes and put the brakes on public spending to bring their books closer to balance.
Gross global debt is forecast to rise this year by more than 13 percentage points to 96.4 per cent of world output. In the UK, debt is predicted to rise from 85.4 per cent of GDP last year to 95.7 per cent this year.
Countries that are already heavily indebted will come under most pressure. Italy, which has been ravaged by the virus, is forecast to see its net debt rise by more than 20 percentage points to 155.5 per cent of its national income. In Germany, by contrast, net debt is predicted to rise by just under nine percentage points to just under 69 per cent of GDP.
The IMF said fiscal policy – the actions governments take to support their countries through public spending and the tax system – is key to saving lives and protecting people. However, it cautioned against writing blank cheques.
‘Governments have to do whatever it takes. But they must make sure to keep the receipts,’ it said.
The Fiscal Monitor was published against a backdrop of mounting anxiety over the virus. Thinktank the Resolution Foundation predicts if the UK lockdown lasts for six or 12 months, it could take between two and five years for the economy to recover.
The IMF has already warned that the slump from the deadly coronavirus will dwarf the recession that followed the financial crisis, and result in a fall in global output of more than £7trillion this year and next.