How the Covid-19 Pandemic Threatens Public Finances

Struggle for Positive Health and Economic Impact Constrained by Plummeting Revenue and Soaring Expenditures

It should come as no surprise that public finances are under significant stress in all countries because of the pandemic. And, it’s difficult to predict future effects because of health and economic uncertainties:

  • Vaccines,”herd immunity”, vulnerabilities
  • Politics, behaviour, inequity, social cohesion, “fake news”, distrust in government
  • Global supply chain and small business disruption

Challenges to uncover revenue to fund the pandemic response include:

  • negative growth reduces business tax income
  • increased unemployment reduces citizen tax income
  • necessary tax holidays reduce tax mobilization
  • many who can afford to pay are deferring tax payments because of uncertainty

Challenges to focus spending on the pandemic response include:

  • supporting companies to weather the pandemic and provide necessary goods and services
  • supporting citizens who need humanitarian aid or have lost jobs
  • procuring necessary PPE supplies, medical equipment, and keeping health facilities operating
  • supporting health professionals and maintaining critical government services
  • identifying which interventions will have the most impact

The revenue and spending challenges seem like opposite sides of the same coin
The bottom line: few governments have the necessary fiscal space

  • borrowing for counter-cyclical spending is compromised by large public debt that is expected to balloon

Meanwhile, there are numerous additional effects:

  • dropping remittances and the return of migrant workers
  • reduced physical health because of Covid-19 and the impact on health services to help those afflicted with other problems
  • reduced mental health from isolation and uncertainty

Takeaway: don’t waste a perfectly good crisis – this is the kind of compelling event to motivate change

  • leverage lessons for more resilient public financial management

Lessons learned include:

  • Align policy to what’s socially and culturally important to citizens rather that mostly economic growth
  • Integrate operating, capital, development, salary, treasury, and debt management systems to improve fiscal space
  • Develop emergency fiscal scenarios to improve the economic response and better predict cash requirements, revenue and expenditure changes
  • Optimize value-for-money with procurement aligned to government goals
  • Create fiscal transparency portals to gain citizen and donor trust

Context: public financial management reform is part of the solution

  • Horizon 1: improve selected processes by tweaking current technology investments and increasing automation of decision-making and fiscal transparency information during the pandemic
  • Horizon 2: leverage risk and opportunity analysis to improve additional processes and integration for the post-pandemic recovery period
  • Horizon 3: use an integrated analysis approach to identify biggest impact from technology modernization, process and legal reform

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