The policymaker’s fiscal trilemma: increase spending, lower taxes and reduce debt

 

Abebe Aemro Selassie and Andrew Tiffin of IMF in this new post:

Imagine you’re a policymaker in sub-Saharan Africa. You’ve been charged with lifting your country out of the worst health crisis in living memory, and nobody around you knows when it will end—the second wave that gripped the region earlier in the year has eased, but many countries are nonetheless bracing for further waves as winter approaches.

One piece of good news is that a global recovery is well underway. Key economies are rebounding sharply, global trade has improved, commodity prices are higher, and investment flows have resumed.

The bad news is that, for sub-Saharan Africa, at least, near-term growth prospects are somewhat more subdued. And as long as widespread vaccination remains out of reach, you will face the unenviable task of trying to boost your economy while simultaneously dealing with repeated COVID-19 outbreaks as they arise.

This is the situation facing many finance ministers in sub-Saharan Africa today. And they face three immediate challenges: Firstly, to meet increased spending needs; secondly, to contain a pronounced increase in public debt, and finally, to mobilize more tax revenues.

How policymakers navigate this trilemma will have a huge bearing on economic and social outcomes in the coming years.

An incredibly difficult balancing act is needed as efforts to address one element will inevitably come at the expense of the other two. Higher spending, for example, will require that the authorities either take on more debt or increase taxes. Or both. On the other hand, efforts to boost tax revenues—although politically and socially challenging—would provide much-needed resources to either increase spending or contain debt. Or both.

Obviously MMTers will disagree to this trilemma.

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