Global Fiscal Adjustment Appropriate, But More Clarity on Exit Plans, Long-Term Reforms Needed, Says IMF’s Fiscal MonitorPress Release No.10/414
November 4, 2010
Fiscal policy is beginning a gradual shift from supporting demand to reducing deficits. Nevertheless, fiscal risks remain elevated in advanced economies where public debt ratios as percentage of GDP are still rising rapidly, the International Monetary Fund (IMF) said in its latest edition of the Fiscal Monitor, Fiscal Exit: From Strategy to Implementation. The study, released twice a year, sees fiscal tightening becoming broader and driven by discretionary measures in 2011, in both advanced and emerging economies, but underscores the need for more clarity on exit plans and reforms to address long-term fiscal costs. Furthermore, if growth threatens to slow appreciably more than expected, advanced economies with fiscal room should allow full play to the automatic stabilizers. In addition, if needed for the recovery to continue, some of the consolidation planned for 2011 may also have to be postponed.
The Monitor, drawing on projections from the October 2010 World Economic Outlook (WEO), shows that:
• The global fiscal deficit is projected to fall from 6¾ percent of GDP in 2009 to 6 percent this year, in line with earlier projections. Deficit declines are mostly due to improved economic conditions and to lower support to the financial sector.
• In 2011, the global fiscal deficit will fall further, to about 5 percent of GDP. About 90 percent of countries are projected to record smaller deficits next year (relative to 2010), with most of the deficit decline due to policy tightening. The projected pace of tightening is broadly appropriate, striking a balance between addressing fiscal concerns and avoiding an abrupt withdrawal of support to the nascent recovery.
• A review of fiscal plans for 25 countries (the G-20 plus Greece, Ireland, Latvia, Lithuania, Portugal, and Spain) finds that 90 percent of them have announced that they will gradually reduce their medium-term deficits, with the overall pace of underlying adjustment being broadly appropriate. But in many cases detailed adjustment measures have not been identified. For example, comprehensive reforms needed to contain medium and long-term spending pressures in health care are missing from all the plans. Fundamental reforms of social welfare systems, such as better targeting of benefits, are also lacking. Few countries have explicitly committed to a long-run target for their public debt ratio or, where such a target predated the crisis, have indicated clearly when they intend to achieve it, thus leaving the ultimate fiscal strategy goal uncertain.
• Risks for advanced economies, especially those already under market pressure, remain high by historical standards. Among them are the possibility of sovereign rollover problems arising, over the short to medium term, at a regional or global level, and public debt ratios stabilizing, over the longer run, at elevated levels. These risks are lower but not insignificant for emerging markets.
• Risks arising from macroeconomic uncertainty are generally higher than six months ago, amid concerns that the global recovery may be losing steam. On the other hand, risks related to the quality of plans have broadly eased, as countries have announced or even begun implementing at least some aspects of their fiscal exit strategies. Global market sentiment has improved toward emerging markets but worsened toward those advanced economies that were already under pressure in May 2010.