IMF Survey: Restoring Confidence in Government Finances Critical

September 27, 2011

  • Governments need to implement plans to cut debts, deficits over next few years
  • Policies should support growth, job creation
  • Emerging markets not immune to troubles in United States, Europe

Policymakers need to restore confidence in government balance sheets by cutting debts and deficits while supporting growth, according to experts meeting alongside global officials during the Annual Meetings of the IMF and World Bank.

Restoring Confidence in Government Finances Critical

Shoppers in London, England: growth helps countries create jobs (photo: Carl Court/AFP)


How to deal with the huge burden of high public debt and create jobs as many advanced economies face anxious financial markets is complicated, panelists said during a session of the Program of Seminars in Washington, D.C. on September 23.

“Policymakers need to ensure the public sector is not a source of instability by committing to a plan that will stabilize and then bring down public debt,” said Carlo Cottarelli, head of the IMF’s Fiscal Affairs Department. “At the same time, they need to avoid a rapid fiscal tightening that could undermine the economic recovery, which is at a delicate moment.”

Cottarelli said some countries facing high borrowing costs from financial markets have no choice but to start cutting back now.

In a speech earlier in the day, IMF chief Christine Lagarde said weak growth and balance sheets—a snapshot of the assets and liabilities held by a government, financial institution or household—are having a negative impact on each other.

The latest issue of the IMF’s Fiscal Monitor said all governments face difficult policy choices. Many need to further develop their plans to reduce debts and deficits over the medium term, and then communicate them to investors and financial markets.

Growth and employment

The key for governments is choosing policies that reduce government debt and deficits, and create growth and jobs.

“The tension is if you keep piling on the debt that’s terrible for jobs,” said Maya MacGuineas, head of the Washington D.C.-based bipartisan Committee for a Responsible Federal Budget.

The IMF’s latest World Economic Outlook said growth in the advanced economies is projected at 1.6 percent in 2011. For emerging and developing economies growth is projected at 6.4 percent in 2011.

“There might be growth without employment, but there is never job creation without growth,” said Cottarelli.

Sharan Burrow, head of the International Trade Union Confederation based in Belgium, said countries must not achieve fiscal consolidation “off the backs of working people.”

European woes

For many advanced economies in Europe, debt ratios are now projected to go up by less than previously expected. In some cases, they are even expected to fall. This reflects the commitment these countries have made to reduce their deficits over an extended period.

But in recent weeks jittery financial markets seem to have ignored this progress and the agreement by European leaders on July 21 to support the euro.

“European rescue efforts are not seen as credible by the markets,” said Thomas Mayer, chief economist at Deutsche Bank Group in Germany.

This is due in part to a lack of implementation of the deal and financial markets’ need for clarity and certainty.

“Europe needs to speak with a single voice,” said Cottarelli.

Emerging markets

While the focus has been on advanced economies, many emerging economies are experiencing an economic boom but are not immune to the troubles of the United States and Europe.

“We are very concerned about what is going on in the rest of the world,” said Felipe Larraín, Minister of Finance of Chile, which is enjoying strong growth and a fiscal surplus in 2011 of 1 percent of GDP.

“We’re all in this together.”

Larrain said the key for emerging economies doing well economically is to develop contingency plans, and to “save more in the good times, so you can spend in the bad ones.”

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