By Fernando de la Cruz Prego, head of the Public Finance action line of the EUROsociAL+ Democratic Governance policy area at the FIIAPP.
Short-term mitigation policies
The COVID-19 crisis, like the vast majority of crises, is having a greater impact on the most vulnerable sectors of society. We are seeing this in the health sphere (in the elderly and the sick), in the social sphere (sectors with lower incomes and reduced access to public services) and in the economic sphere (SMEs and the self-employed). This common denominator, vulnerability, has forced states to deploy a whole battery of public policies aimed at containing and mitigating the effects of the virus.
In health matters, the access to and coverage of health systems has been expanded, as well as the purchase of equipment and materials to prevent and treat infections. In the social sphere, assistance programmes have been created or expanded to provide minimum incomes to the most vulnerable sectors; and in the economic sphere, liquidity lines have been put in place for companies and the self-employed, as well as reductions and flexibility in tax payments. These have been the main public measures to face the effects of the virus in the short term.
However, the States’ capacity to deploy these policies differs depending on the resources available to each one. Thus, countries with a lesser degree of development or with a narrow fiscal space are seeing their response limited, if they do not resort to increasing their debt. This is what is happening in many developing countries, among others, in a large part of Latin American countries, especially in those that were already facing recessive contexts as a result of the fall in the prices of their commodities.
In short, vulnerabilities are not only health, economic or social, but also national. There are countries whose tax positions have deteriorated excessively, meaning that they cannot give an adequate response to the multiple crises unleashed by the Coronavirus. In this sense, various analysts have pointed out, and several governments are demanding, a refocusing of the policies for managing the external public debt, as well as the criteria and conditions for access to new lines of financing from international organisations. In essence, it is about reducing the debt service burdens, so that resources can be freed up for public spending, which must also be reinforced through soft, cheap lines of credit which do not include tax conditions.
Medium-term recovery policies
Beyond the immediate policies, governments face innumerable medium-term challenges. The projections of growth, unemployment, poverty and inequality offered by most organisations for this year show a panorama of acute global economic and social depression. According to ECLAC projections, the Latin American region is heading towards potential 5% falls in GDP, a 15% reduction in exports and an increase of 12 million unemployed and 30 million citizens who will fall below the poverty threshold.
Responding to these projections requires rethinking medium-term tax policies. Three elements seem key to moving towards this “new” tax approach. First, tackling pending tax reforms to maximise public tax collection capacity and enhance their redistributive effects through greater progressiveness in the tax structure. Furthermore, this effort should be accompanied by a real fight against tax evasion and avoidance at the international level. Finally, the pertinence of generating new taxes, both on wealth and on technological industries and fossil fuels, must be assessed.
The second leg of the new fiscal approach points to public spending, covering aspects such as total volumes and their multipliers, sector priorities, especially in the social sphere, and the quality and efficiency of their budget management and execution. The new post-coronavirus reality will require a significant effort in terms of health spending, both to expand access and to improve the capacity to absorb patients, which in turn will require deepening and improving the mechanisms of decentralisation and territorial management on the departmental and municipal level. As far as possible, this reinforcement should extend to the Welfare State as a whole, to areas such as education, pensions or social protection, for which citizens were already demanding improvements before the crisis, but which will now become fundamental demands to ensure a minimum level of social cohesion. For all this, it will be necessary to deepen the transparency and evaluation of fiscal resources, which will enable the legitimisation and optimisation of the their usage. Lastly, the region must carry out a review in the sectoral allocation of public spending, looking at those programmes that reinforce their impact in terms of redistribution and economic growth in a complementary way, and thus promote the recovery phase through extra demand and the strengthening of human capital.
Fiscal and financial cooperation
Finally, the third leg of tax policies should be international aid, especially in those countries with less fiscal space. The need to relax debt payments has already been mentioned, either through moratoriums, partial write-offs or cancellations, as well as with lines of concessional financing with limited conditions.
In addition, it is necessary to go beyond such financial aid volumes, which will require political commitments from donors. In this framework, it is necessary to advance in various areas, of course, and as a priority, in the governance of global health through mechanisms that ensure health as a global right. If this pandemic has shown anything, it is that we either protect ourselves and heal as a global community or sooner or later the problems of some will affect others. The already recurring phrase “the virus knows no borders” is nothing trivial.
However, this enhanced cooperation at the global level must go beyond health. Before the crisis, many issues demanded progress in global governance, including those related to climate change or international tax policies and rules to prevent corporate tax evasion and avoidance. This last point is of vital importance in the effort to strengthen the States’ capacity to earn taxes. A global commitment to advance the implementation of the BEPS regulations would be an excellent step forward. Ideally, these issues should be combined with many others, encompassing other global public goods, such as education, innovation or trade.
From the EUROsociAL+ Programme we will contribute to the advancement of this new public policy agenda with an approach of greater solidarity, well-being and social and territorial cohesion between the European and Latin American regions.