The IMF (International Monetary Fund) says today in its Fiscal Monitor Report Update that deficits in many advanced economies fell significantly during 2011, and most plan substantial  adjustment this year. The Fund said continued adjustment is necessary for medium-term debt sustainability, but should ideally occur at a pace that supports adequate growth in output and employment.

In advanced economies, fiscal deficits fell in 2011 by about 1% of GDP overall, and by only slightly less after taking into account the narrowing output gap. The headline deficit fell by 2% of GDP (gross domestic product) in the Eurozone, and by a still sizable 1¼% of GDP in cyclically adjusted terms. However, a large share of the improvement within the Eurozone is accounted for by Germany, where the cyclically adjusted deficit fell by 2¼% of GDP, reflecting an unusually strong response of revenues and employment to output.

The IMF says cyclically adjusted (the total budget deficit minus the effects of the business cycle) balance also strengthened substantially in Spain, while France and Italy posted more modest improvements, as measures announced or approved in these countries will not take full effect until next year. Cyclically adjusted deficits also fell substantially in the United Kingdom and the United States, but rose marginally in Japan owing to reconstruction costs related to the natural disaster.

Among European program (bailout) countries, headline deficits were larger than expected in Greece owing in part to a weaker economic outturn. Slippages in the implementation of revenue and spending measures and lower tax compliance suggest that the cyclically adjusted deficit exceeded expectations as well, notwithstanding an improvement of 3 percentage points of GDP relative to 2010.

In Portugal, the fiscal target was met through a one-time partial transfer of banks’ pension fund assets, implying that the underlying adjustment in 2011 was smaller than expected there, although still very sizable (4 percentage points of GDP in cyclically adjusted terms). In Ireland, headline fiscal outturns were on track, and the cyclically adjusted balance improved by 2% of GDP.

Fiscal Monitor Report Update [pdf]

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