Covid has hit the poor hardest. Is the IMF right to call for a Jubilee?
When even the International Monetary Fund (IMF) is arguing for a major shift in tax and spending to tackle inequality, governments should listen. The latest Fiscal Monitor may not top most people’s reading lists, but it has attracted headlines for having called for wealth taxes. The main message, however, was even more radical. Worried about the future of societies around the world, the IMF is calling for a Jubilee — a transformation of the economy. Why? Because, in the words of Vitor Gaspar, director of the IMF’s Fiscal Affairs Department, “it is crucial to give everyone a fair shot at life success”.
The pandemic has caused extensive harm across the world and is continuing to do so. At least three million people have died so far and there are still around half a million new infections a day. Vaccines are being rolled out rapidly but unevenly, with some countries immunising their citizens at a rapid rate while others, usually the poorer countries, have hardly begun. The economic disruption has also been widespread. As we look ahead to the subjugation of Covid-19, it seems unlikely that government support will be maintained at current levels, while many countries could not afford it at all. Yet inequalities that existed before the pandemic have been exacerbated. A fiscal retrenchment risks tearing societies apart and, the IMF says, “a vicious cycle of inequality could morph into a social and political seismic crack”.
Inequality was a serious problem long before the pandemic. In advanced and larger emerging market economies, inequality has risen over the past three decades, though it has declined in lower income countries. There are a variety of reasons for this divergence, including aspects of globalisation and technological development, although the demographics of the global labour market may also have much to do with it.
Wealth inequality is greater than income inequality. The IMF highlights how different types of inequality — for example in wealth, income, opportunity, and access to basic services — reinforce each other. Feedback loops cross the generations. Wealthy parents can fund education and ensure better access to jobs for their offspring, which leads to higher income and greater wealth in turn, while the reverse is true for poorer parents. This is the “vicious cycle of inequality”. A debate about what types of inequality matter most misses the point: all are connected.
When a pandemic strikes, as is happening now, inequalities get worse. The IMF outlines the ways in which this has happened, including inequalities in income, health and education. In education, it is estimated that the pandemic has caused children in advanced economies to lose up to 25 per cent of the school year, but their counterparts in lower income countries up to 50 per cent of their year. The outcomes for individuals are linked to household income and parental education; vicious cycles are in play.
However, a vicious cycle can be turned into a virtuous cycle. The IMF recommends that governments focus on social security nets, health, and education services, which have been under stress. Policies should protect people rather than jobs, it argues. It focuses on education spending, to both help pupils catch up with learning and to reduce inequality in the longer term. Additional health investment, starting with maternal health, is seen as vital. Tax increases, more progressive taxation and better use of tax to distribute income and wealth are recommended.
The analysis of the IMF’s Fiscal Monitor leads to a number of questions and implications.
The IMF has long been associated with policies that reduced the role of government, though recently it has modified its stance: “Governments need to provide everyone with a fair shot – enabling all individuals to reach their potential.” With a consensus forming around this view, what does it mean to be on the centre-Left of politics these days?
The IMF stresses its support for free and competitive markets, but it is really advocating a new form of capitalism. What does this mean for the future relationship between government and markets?
Taxes on wealth will rise. There are debates about the technicalities of wealth taxes, and whether they should be one-off levies or permanent, but they will happen in some form. Most likely there will be higher property and inheritance taxes and raids on pension funds. Meanwhile, governments will seek other ways of widening the tax base.
Investment in health and education will probably be maintained post-pandemic but with an emphasis on resilience. Alongside public investment there are likely to be opportunities for private sector companies which can meet needs and demonstrate they can save costs, including through technological improvements such as diagnostic tools, automation, and learning support.
Government borrowing levels will remain elevated for some time. The IMF does not expect much, if any, reduction in net debt-to-GDP ratios anytime soon. Ageing populations may put greater pressures on government finances, further driving the search for technological solutions. There will be little pressure for central banks to unwind their quantitative easing.
There will be greater scope for excessive wasted spending and graft. Governments have still not cracked how to spend effectively and efficiently and, while spending increases were necessary, the pandemic saw billions wasted. The IMF highlights the risk that this could lead to political and social unrest. Governments will need something like the effective spending guarantee that I advocated ten years ago.
The IMF stresses the obligation of government to provide people with a fair chance in life, not merely hope it has put the right conditions in place. It reflects a substantial shift in conventional wisdom, which we can already see being implemented in the US and elsewhere. But this is about more than just another stimulus package.
The IMF is saying that our very social fabric is at risk unless action is taken to combat inequality. This might be a radical message, but it is not new. It sounds very much like an echo of the Jubilee laws found in the Bible. There, debt was cancelled every seven years and assets redistributed every 49 years. Exactly how Jubilee would be applied today is much debated. The Jubilee principles seem clear however: do not let people be saddled with debt and ensure every generation has a fair chance, or, as the IMF might say, a “fair shot”. Governments, citizens, investors, and others would do well to listen to this ancient message in new guise, and take action to maintain our societies and market economies before it is too late.