IMF urges governments to turn on the spending taps

A 1pc rise in public investment could eventually create up to 33m new jobs, the international lender has said

IMF director general Kristalina Georgieva
IMF director general Kristalina Georgieva

Governments could create up to 33m new jobs by opening the spending taps to underpin the post-Covid-19 recovery, the International Monetary Fund has said.

The body’s latest Fiscal Monitor stressed the “time is now” for public investment in the wake of the crisis to help reverse a decade of under-spending around the world.

If targeted at high-quality projects, the IMF estimates that a 1pc rise in public investment could bolster output by as much as 2.7pc and private investment by 10pc.

The spending spree would also trigger 7m new jobs directly and between 20m and 33m indirectly across advanced and emerging economies over a longer period, the IMF claimed.

Vitor Gaspar, the director of the organisation’s fiscal affairs department, said: “In many countries, the time is now to undertake high quality public investment, in priority projects. It can be done by borrowing at low cost.”

Its study of 72 economies suggested that “demand reacts strongly to public investment shocks, possibly because they signal a government’s commitment to growth and stability”. 

“By raising confidence, a push in public investment is also likely to foster investment from businesses that might otherwise remain cautious in their hiring,” the report added.

The findings are likely to fuel the debate at the top of a UK Government which promised an “infrastructure revolution” before coronavirus emerged this year.

Prime Minister Boris Johnson approved the HS2 high-speed rail link in February and pledged a major increase in infrastructure spending in March’s Budget, with borrowing costs close to all-time lows. 

But Chancellor Rishi Sunak - now faced with a record peacetime deficit close to £400bn this year - is more cautious and stressed in his conference speech yesterday the Conservatives’ “sacred duty” to protect the public finances.

Even before the pandemic, the IMF said public investment "had been weak for over a decade", despite crumbling roads and bridges in some advanced economies like Germany and massive demand for sanitation and transport spending in poorer countries.

The organisation estimates two to eight jobs are created for every $1m spent on traditional infrastructure, and 5 to 14 for every $1m spent on research, development and green technology.

But the body also warned that the wider beneficial effect of public spending could be countered by the debts racked up by hundreds of thousands of private sector firms to weather the pandemic. 

“The response to a public investment shock is stronger for firms with low leverage,” the report said.