Interesting article from the UK Institute for Fiscal Studies, discussing the most appropriate fiscal support measures for low and middle-income countries.
The gist of the article is that, at the moment, the focus should be on targeted support, rather than on broad-based stimulus measures.
For example, broad-based tax cuts might miss the mark, as most businesses would, in any case, be facing low profitability. Also, given the large size of the informal sector in such countries, such a fiscal measure would end up wide of the mark. Many businesses, being outside the formal tax net, would not benefit from the measure.
The article highlights certain targeted measures that could work, depending on the circumstances of the country. Broadly, these would be measures that bolster the cash flow of individuals and businesses in the sectors hard hit by the coronavirus situation. These include:
(i) deferral of tax payments;
(ii) expediting of tax refunds;
(iii) reduction of VAT and withholding tax rates; and
(iv) introducing more generous loss-carry forward rules.
The article is also in favour of measures that reduce the cost of labour to businesses. These could include, for example, temporary exemption from payroll related taxes and employer-related social security contributions. Also worth considering are temporary wage subsidies, perhaps along the lines adopted by the United Kingdom in response to the coronavirus pandemic. The United Kingdom is, of course, in a totally different position from a low or middle-income country. Affordability remains a key consideration.
The article looks favourably upon several other possible measures. These include:
(i) the temporary waiver of taxes that act as barriers to tax transfers and remittances (e.g. taxes on electronic money transfers);
(ii) deferral of previously planned revenue-raising measures; and
(iii) targeted support via local government and social protection systems.
This is not to rule out entirely the possibility (or desirability) of broad-based stimulus measures. The point being made is that those measures may eventually be required, but it is not yet the time for that. The focus for the moment should be on support. That is the need of the present hour. Stimulus measures could follow thereafter.