Governments have taken unprecedented fiscal action in response to the Covid-19 crisis, but countries will need to support economic recovery in the face of significantly increasing fiscal challenges, according a new OECD report.

Tax Policy Reforms 2020 describes the latest tax reforms across OECD countries, as well as in Argentina, China, Indonesia and South Africa. The report identifies major tax policy trends adopted before the Covid-19 crisis and takes stock of the tax and broader fiscal measures introduced by countries in response to the pandemic, from its outbreak to June 2020.

The report shows that while the size of fiscal packages in response to the Covid-19 crisis has varied across countries, most have been significant, and many countries have taken unprecedented action. It also points out that most countries have adopted a phased approach to Covid-19, gradually adapting their fiscal packages as the crisis has unfolded. Initial government responses focused on providing income support to households and liquidity to businesses to help them stay afloat.

As the crisis has continued, many countries expanded their initial response packages. The most recent measures and discussions suggest that the recovery phase will be supported by expansionary fiscal policy in a number of countries.

With countries facing such high levels of uncertainty, policy agility will be key and targeted support measures should be maintained as long as needed to avoid scarring effects, according to the report. Once recovery is well underway, governments should shift from crisis management to more structural tax reforms, but they must be careful not to act prematurely as this could jeopardise recovery.

Rising pressure on public finances as well as increased demands for fairer burden-sharing should also provide new impetus to reach an agreement on digital taxation.

Tax Policy Reforms 2020 also provides an overview of the reforms introduced before the Covid-19 crisis. It highlights continuation of a number of trends identified in previous years, including personal income tax reductions for low and middle-income households and the stabilisation of standard value-added tax (VAT) rates observed across many countries. Corporate tax rates have continued to decline, but at a faster pace than in 2019.