The IMF has issued a rallying call to rich countries around the world to increase public investment as the best way to encourage a strong economic recovery from the coronavirus pandemic.
Advanced economies should not worry about debt, but instead take advantage of historically low borrowing costs to increase spending on infrastructure maintenance immediately, the IMF said in a report published on Monday.
They should also prepare plans for subsequent new capital spending on digital infrastructure and green technology, it said in a chapter of its semi-annual Fiscal Monitor.
The report marked a complete reversal of the fund’s normal concerns about public finances in rich countries.
Speaking to the Financial Times, Paolo Mauro, deputy director of fiscal affairs at the IMF, said the high level of uncertainty in the global economy strengthened the case for increasing public investment.
“You get a bigger bang for your buck from public investment because investment by private firms is extremely low,” he said.
Many countries have already begun to increase spending in response to the economic damage caused by the pandemic. The EU’s €750bn recovery fund is designed to reconstruct the continent’s stricken economies, while the UK is planning rapidly to increase public investment by close to 1 per cent of national income.
The IMF estimated that in current conditions, increasing public investment by 1 per cent of gross domestic product was likely to increase GDP by over 2 per cent after two years — a larger return than it had previously estimated. This suggests there is the scope to generate between 2m and 3m jobs in the EU, another 2m in the US and more elsewhere, the IMF said.
“The place to start is maintenance, which is very labour intensive and can address crumbling infrastructure,” Mr Mauro said.
The IMF stressed that its strong backing for public capital expenditure was not about increasing spending for its own sake.
Mr Mauro referred to the famous suggestion by economist John Maynard Keynes that workers should be employed to dig holes in the ground and fill them back in, simply as a means of providing employment and thus boosting consumer spending.
“We are certainly not talking about digging holes,” he said. “Investment provides an asset for the country and is not wasteful. Right now, we are not at the point of literally trying to stimulate aggregate demand.”
He noted that the efficiency of public investment was likely to drop if spending was increased quickly, especially on new investment projects rather than improving existing assets such as roads or airports.
The IMF also warned that emerging economies and low income countries, which did not have unlimited access to finance, would need to be more careful in using public investment as a vehicle to aid their recovery from the downturn.
In these countries the focus should be on “public investment management to ensure the money is well spent . . . This can improve efficiency by a third, ensuring countries do more with less”, Mr Mauro said.
Alongside public investment, the IMF also said that if private companies were to return to more normal levels of private investment at a time when many had taken on large debts, governments would need to ensure their bankruptcy systems were working efficiently.
The IMF has produced a three-stage plan for countries dealing with coronavirus. While the virus is still rampant, all efforts should be on saving lives and ensuring health systems work effectively, it said.
Once economies could partially reopen, governments should focus attention on small-scale maintenance projects while preparing plans for new infrastructure, particularly large transformational projects which would bring economic benefits in the post-Covid era, the fund said.