Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

IMF Survey: Government Deficits Mostly Fell in 2010, Pace Will Slow in 2011

January 27, 2011

  • Advanced economy debt rising, cutting public debt vital in the next few years
  • Europe's plans to reduce deficits on track, other key countries falling short in 2011
  • Emerging economies should save their windfall for a rainy day

As the global economy continues to recover, countries’ fiscal performance in 2010 was slightly better than projected last November, but debt levels in many advanced economies remain high and are rising, the IMF said in its latest analysis of global debt and deficits.

Government Deficits Mostly Fell in 2010, Pace Will Slow in 2011

The pace of countries’ plans to reduce debts and deficits will slow in 2011, according to the IMF (photo: IMF)

GOVERNMENT DEBT

Many countries’ deficits have fallen in the past year, reflecting both higher revenues due to improved economic growth and lower spending. Advanced economies’ average deficits declined to 8 percent of GDP in 2010, a slight improvement over earlier projections, according to new data in the IMF Fiscal Monitor Update released on January 27 in Washington, D.C.

But the IMF projects the pace at which advanced economies reduce their deficits and accumulated debt will be slower on average in 2011 as some countries delay their plans.

Earlier in the week, the IMF said the global economy will grow by 4½ percent in 2011, but action is still needed to address key problems, including high unemployment and banking issues in advanced economies and risks of overheating in emerging markets, according to the latest World Economic Outlook and Global Financial Stability Report, released on January 25 in Johannesburg, South Africa.

Government bond yields in all major advanced economies have increased since November in the wake of stronger growth prospects. Financial market pressures have remained limited to a few European countries. Overall government debt remains very high for advanced economies, topping 96 percent of GDP in 2010, the IMF said.

“Fiscal risks remain elevated and in some respects have increased since our November Fiscal Monitor,” said Carlo Cottarelli, Director of the IMF’s Fiscal Affairs Department, which produced the report. “This underscores the importance of making more specific and concrete the fiscal adjustment plans that countries have to implement over the medium term.”

Different countries, different speeds

The pace of fiscal adjustment varied across advanced and emerging economies, and depended on differences in countries’ debt levels, economic growth and financial market pressures, according to the IMF.

Overall, emerging market economies’ deficits declined ¾ percent in 2010, in line with the IMF’s November forecast. While revenues increased thanks to higher economic growth and commodity prices, so did spending in a number of countries. Average government debt in emerging economies was 37 percent of GDP, the IMF said.

The average emerging economy deficit is expected to decline by about ¾ percent of GDP in 2011, according to the IMF.

Progress will be slower among the Group of Twenty advanced economies, with average deficits expected to fall by ½ percent of GDP in 2011, less than half the decline projected by the IMF in November. Delayed fiscal adjustment in the United States and Japan relative to the pace projected in November is the main factor accounting for the smaller deficit reduction. All countries will need to detail the medium-term measures they plan to adopt to reduce deficits and debt.

The Fiscal Monitor Update said strong and transparent institutions charged with government budgets, revenues and spending are critical for countries’ plans over the next few years to bring down government debt and deficits, but progress has been mixed.

The IMF said booming emerging market economies should resist spending pressures and save any excess revenue from temporary factors, such as above trend growth, commodity price booms, and asset price booms. This will help them build up their fiscal buffers, avoid procyclical policies, and prevent their economies from overheating.