COVID-19 is causing countries to pour massive amounts of funds into economies as they try to fend off the devastating impact of the pandemic. Although the final economic and societal damage is still hard to grasp at the moment, a recent World Bank report forecasts a 5.2% baseline contraction in global GDP for 2020, leading to the deepest global recession in decades. Other studies show that the world output is not expected to return to pre-pandemic levels until the end of the 2021Q2 under the baseline or even 2021Q3 under the downside scenario. As a result, countries are running massive deficits. The soaring public spending, together with the adverse effect of the looming recession on future tax receipts, are leading to unprecedented levels of budget deficit worldwide. As the world is trying to adapt to the new normal, the question starts to emerge — how are countries going to pay for the pandemic? Although we are still immersed in an unprecedented level of uncertainties forced upon the world by the virus, one thing seems beyond dispute — at some point, taxes will have to rise. The question is, when, which and by how much? This brings us to a more general question – is this the only way out? What can countries do both in the short and long term to pay for the pandemic? And how can these measures be implemented not to hinder, but to encourage business activity and economic recovery the world desperately needs? Broadly speaking, countries have two different strategies to tackle the problem of funding the public-finance shortfall caused by the pandemic: they can borrow through the crisis and they can increase taxes. Although different, they are not mutually exclusive.
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