## Chapter 1: Fiscal Policy in the

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Great Election Year

### Global outlook and fiscal normalization
- Even as the economic and financial outlook for the global economy is stabilizing (April 2024 World Economic Outlook), efforts to normalize fiscal policy continue to struggle with the legacies of high debt and deficits while facing new challenges.
- After a brisk reduction in fiscal deficits and public debt levels in 2021–22, fiscal aggregates turned in 2023, halting progress toward policy normalization.
- Durable fiscal consolidation efforts are needed to safeguard sustainable public finances and rebuild buffers in a context of slowing medium-term growth prospects and high real interest rates.
- Fiscal tightening would also support the “last mile” of disinflation, especially in overheated economies.

### Drivers of higher deficits and debt since the pandemic
- Four years after the COVID-19 pandemic outbreak, fiscal deficits and debts are higher than prepandemic projections.
- Key contributors:
  - Higher interest rates pushed up interest expenses.
  - Spending on social benefits, subsidies, and transfers was buoyed by the extension of support measures enacted in response to the pandemic and energy price shocks.
  - Many economies introduced new fiscal initiatives to cut taxes and social security contributions and increase spending through higher wage bills, social benefits, and industrial policy measures.
  - These initiatives were only partially offset by revenue gains from past inflation as inflation surprises waned and tax brackets caught up with wage growth.
  - Financing for most low-income developing economies remained scarce, determining the evolution of fiscal balances.

### Projections and risks
- In 2024, overall primary deficits are expected to narrow to 4.9 percent of GDP.
- The “Great Election Year” amplifies fiscal risks:
  - 88 economies or economic areas representing more than half of the world’s population and GDP have already held or will hold elections during the year.
  - Empirical evidence shows that fiscal policy tends to be looser, and slippages larger, during election years.
- Other risk factors:
  - The pace of the last mile of inflation’s descent to target remains uncertain.
  - Financing conditions are sensitive to the inflation outlook, as well as to interest rates and fiscal policy developments in major economies.
  - Loose fiscal policy and rising debt levels, in addition to monetary policy tightening, have contributed to the increase in long-term government yields and their heightened volatility in the United States, raising risks elsewhere through interest rate spillovers.
  - Slowing growth and financial turbulence in China could weigh on global growth and trade, posing fiscal challenges for countries with strong trade and investment linkages.
  - Governments may face pressure to extend fiscal support in the event of renewed supply disruptions and price shocks.
  - Debt refinancing risks remain high for many countries.
- Under current policies:
  - Improvements in fiscal aggregates are expected to be modest.
  - Deficits and debts are projected to remain higher over the medium term than was expected before the pandemic.
  - Global public debt is projected to approach 99 percent of GDP by 2029, driven by China and the United States where, under current policies, public debt is projected to continue rising beyond historical peaks.
  - Spending pressures to address structural challenges, including demographic and green transitions, are becoming more pressing.
  - Slowing growth prospects and still-high interest rates are likely to further constrain fiscal space in most economies.

### Policy recommendations and fiscal frameworks
- Fiscal consolidation is needed in most countries to strengthen debt sustainability and financial stability.
- Design and pacing:
  - The pace of fiscal consolidation should be calibrated to strike a balance between fiscal risks and the strength of private demand.
  - Up-front actions are needed in many cases, especially where sovereign risks are elevated and a credible medium-term framework is lacking.
- Immediate actions:
  - Crisis-era support measures should be immediately terminated.
  - The political budget cycle and the drive to further increase spending should be resisted.
- Structural reforms to contain spending pressures:
  - Entitlement reforms in advanced economies with aging populations.
  - Improving the targeting and efficiency of social safety nets to support the most vulnerable populations.
- Revenue and investment policies:
  - Tax revenues should keep up with spending over time.
  - Emerging market and developing economies have a significant scope to increase tax revenues by upgrading tax systems, expanding tax bases, and enhancing institutional capacity.
  - Increased revenues could help pay for strategic public investments needed to facilitate the diffusion of green and digital technologies.
- Growth-oriented fiscal mix:
  - A well-designed fiscal policy mix that supports innovation in the sectors with the largest spillovers and emphasizes public funding for fundamental research could substantially boost long-term growth for economies at the technology frontier.

### International cooperation
- Stronger international cooperation is needed to address multiple challenges that lie ahead.
- Priority areas:
  - More rapid improvements in the global debt restructuring architecture, including through the Group of Twenty’s Common Framework and enhancement of the global financial safety net, could help the most vulnerable economies in debt distress restore debt sustainability.
  - Continued engagement on technical issues, including through the Global Sovereign Debt Roundtable, is essential.
  - Efforts to improve fiscal and debt transparency would facilitate the debt restructuring process.
  - International cooperation on corporate taxation and carbon pricing will encourage necessary investments by mobilizing resources to address common concerns.

*Source: Chapter 1 executive summary (ch1execsum).*

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_Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2024/april/english/ch1execsum.pdf_