IMF Fiscal Monitor:
In many countries, public finances remain on
edge as economies struggle to return to pre-crisis levels of economic growth,
highlighting the need for growth-supporting fiscal reforms while public debt
ratios in advanced countries have stabilised. However, the average debt ratio in
advanced economies, although edging down, sits at historic peaks, and we project
it will still remain above 100% of GDP (gross domestic product) by 2019.
In the latest edition of its
Fiscal Monitor report, the IMF finds that recent policy moves have helped to
broadly stabilize public debt ratios in most advanced economies, but debt in
these countries remains at historic highs. The surge in public debt will take
some time to unwind, and credible medium-term plans must be designed to both
bring down debt ratios and at the same time enhance long-term growth prospects.
Across advanced economies, the pace of fiscal
consolidation is set to slow in 2014 as focus shifts to how to best design
fiscal policies supportive of both further consolidation and a still uneven
“In most countries, persistently high debt ratios
continue to cast shadows over the medium term,” said
Sanjeev Gupta, acting director of the IMF’s Fiscal Affairs Department.
“Against this background, the top priority remains the design and implementation
of credible medium-term consolidation plans to lower debt ratios to safer
levels, while carefully balancing equity and efficiency goals.”
The IMF Fiscal Monitor is published twice a year
to track public finance developments around the world.
Debt stabilises in advanced economies
In 2013, a faster-than-expected pace of fiscal
consolidation in several advanced economies helped stabilise the public debt
ratio and reduce the average overall fiscal deficit among these economies to 5
percent of GDP—almost half its peak in 2009.
The Fund says higher revenues, in part buoyed by
growth, and lower spending helped both the United States and United Kingdom
significantly narrow their 2013 budget deficits. In Japan, however, the deficit
held steady at just under 8 percent of GDP, and the country is now stepping up
its consolidation efforts. To dispel policy uncertainty and support a rebound in
economic growth, formulating a longer-term, growth-friendly fiscal strategy
remains a priority in Japan, as well as in the United States.
Although budget plans for 2015 have not yet been
adopted, fiscal consolidation looks set to continue next year. As a result,
debt-to-GDP ratios will start declining in about half of the highly indebted
advanced economies by 2015—by end-2013 only a few had reached that point.
Vulnerabilities rising in emerging markets and low-income countries
In emerging market economies, deficits remain
significantly above pre-crisis levels, as most countries opted to postpone
fiscal adjustment in 2014. In those emerging market economies closely integrated
with international capital markets, the effects of normalizing global liquidity
conditions is leading to increased borrowing costs and some financial
Even though the recent bouts of turbulence were
not triggered by fiscal imbalances, less investor appetite for risk and tighter
financing conditions may worsen the public debt situation in most of these
countries. According to the Fiscal Monitor, well designed fiscal reform can
boost investor confidence while at the same time strengthening safety nets and
propping up domestic saving where it had been earlier eroded.
Fiscal deficits continued to widen in 2013 in
many low-income countries as government spending persistently outpaced economic
growth and revenue. Overall, debt ratios are projected to increase during the
coming two years—although in most countries, at a moderate pace. Emerging
evidence raises concerns on the efficiency of debt-financed spending; for
example, it often does not seem to have been used to raise much needed public
investment. According to the report, where fiscal adjustment is warranted in
these countries, it should safeguard social safety nets and raise spending
efficiency to address large remaining infrastructure gaps.
The IMF says that ensuring the sustainability of
public finances requires difficult choices on both the taxation and spending
sides of the budget. While tax reform can help boost potential growth through
the removal of distortions, spending reforms help strengthen public service
delivery. Coupled with the projected increase in age-related expenditures
resulting from an aging population, pressures on government spending in the
future will only increase.
The Fiscal Monitor sets out the main elements
needed for meaningful spending reform:
- Ensuring the sustainability of
social spending and public sector wages. Health
care systems in many countries have room to improve efficiency without
drastically cutting services. For public pension systems, raising the
retirement age and adjusting contributions and benefits are the key options.
Containing the growth of the public sector wage bill in a lasting way would
require replacing the across-the-board wage and hiring freezes with deeper,
efficiency-enhancing structural reforms supported by social dialogue.
- Achieving efficiency gains while
aiming to reduce inequality. Large gains can be
made in some countries by improving the efficiency of spending on education.
In other countries, particularly emerging markets and low-income countries,
improving the efficiency of public investment processes could make it easier
to meet infrastructure needs.
- Establishing institutions that
promote spending control. Fiscal rules, such as
those that define and limit spending, can impose binding commitments on the
path of public spending. Decentralizing spending such that sub-national
levels of government become more involved in delivery of services can help
contain public sector growth and improve spending efficiency, provided it is
well planned and implemented.
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