Transcript

Speakers:

Vitor Gaspar, Director, Fiscal Affairs Department, IMF

Davide Furceri, Division Chief, Fiscal Affairs Department, IMF

Era Dabla‑Norris, Deputy Director, Fiscal Affairs Department, IMF

 

Moderator:

Tatiana Mossot, Senior Communications Officer, IMF

Ms. Mossot: Good morning, everyone. Good evening to all of you worldwide. I am Tatiana Mossot from the IMF Communications Department. I will be your host for today's Fiscal Monitor Press Briefing: spending smarter, how efficient and well allocated public spending can boost economic growth. This is the title. And I am delighted to welcome our speakers, Vitor Gaspar, the Director of the Fiscal Affairs Department (FAD); Era Dabla-Norris, Deputy Director of FAD; and Davide Furceri, Division Chief of FAD. Good morning, Vitor, Era, and Davide. Vitor, the floor is yours.

Mr. Gaspar: Good morning, Tatiana. Many thanks for your kind introduction. Thanks to you all for your interest in the Fiscal Monitor covering fiscal policies around the world. The global public debt prospects and risks have deteriorated further since our last meeting in April. In the Fiscal Monitor, global public debt is projected to rise above 100 percent of GDP by 2029. In such a scenario, public debt would be at its highest level since 1948. Moreover, the distribution of risks is tilted towards debt accumulating even faster. With a 5 percent risk, debt would reach 124 percent in 2029.

The world public debt landscape is very diverse. This map displays the Fund's fiscal risk assessment based on the latest debt sustainability framework from Article IV staff reports. Countries differ widely in their deficit and debt levels. Many major economies have public debt greater or projected to grow over 100 percent of GDP. Among the G‑20, these are Canada, China, France, Italy, Japan, the UK, and the US.

These countries typically have deep and liquid sovereign bond markets and often broad policy choices resulting in their fiscal risk ratings being moderate, yellow—or low, green. In contrast, many emerging markets and low-income countries face tougher fiscal challenges despite their debt often below 60 percent of GDP. Their policy options and funding access are limited. As the map shows, 55 countries are assessed at high, pink—or distressed level, red—of fiscal risk. In many cases, relatively low debt to GDP ratios are accompanied by low debt tolerance. Beyond the present, fiscal risks loom large. Public debt dynamics have drastically changed in recent years. It is not only the size of debt but also the cost.

From the Global Financial Crisis through to the COVID period, ever lower interest rates accompanied rising debt, leading to an overall stable interest [burden] budget. However, the situation is now starkly different. Interest rate increases have raised funding costs and strained [the] budget. Indeed, interest spending is estimated to increase to 2.9 percent of GDP in 2025 from 2 percent in 2020, and it is projected to continue to rise through the end of the decade.

The financial environment is also exigent. Financial asset valuations are stretched. Eventually a market correction may occur. Among adverse scenarios, the most concerning is one where fiscal financial feedback loops dominate the propagation mechanism of such initial liquidity disturbance.

In addition, public spending pressures come from defense to response to natural disasters. At the same time, there is considerable resistance to higher taxes. The inescapable conclusion is that starting from too high deficits and debt, the persistence of spending above tax revenues will push debt to ever high heights, threatening sustainability and financial stability. So, prioritizing fiscal policy is essential to support debt sustainability and prepare fiscal buffers to use in case of severe adverse shocks, including financial crisis. But while we do recognize that the fiscal equation is very hard to square politically, the time to prepare is now. Improving growth prospects and enhancing public trust in government help balance the fiscal equation—fiscal policy, structural policy. Deploying fiscal structural policy improves growth prospects and reinforces complementarities and synergies with the private sector. The government can change the composition of public spending while keeping the overall spending envelope constant.

For example, shifting the budget composition towards growth-friendly areas like education and infrastructure can increase the economy's productive capacity and improve growth prospects. Enhancing spending efficiency can also further amplify these benefits. Countries should also prioritize institutional reforms. Good governance, government effectiveness, transparency, and accountability provide foundations for citizens' and investors' trust, helping finance and growth. My colleagues and I are ready to answer your questions. Thank you for your attention.

Ms. Mossot: Thank you, Vitor. Before we open the floor for questions, quick ground rules. Raise your hand, wait for us to come with the mic. For those online, please send the question to WebEx, and we will get to you shortly. The first question, the gentleman in the second row just in the middle, in the center. Can you stand up, please? It will be easier if you can—thank you.

Questioner: Thanks for taking my question. I was just wondering in your report; you talk about the higher degree of rigidity in public spending and advanced economies being not solely attributable to entitlements like pensions and social assistance, but that is a big part of it. You see just in the last day or so that France looks at the drop on popular pension reforms. I just wonder what your prescription is, what your advice is for countries like France looking to push through these changes to its pensions. Thanks.

Mr. Gaspar: Thank you so much for your question. When it comes to France, our advice has been for France to engage in gradual fiscal consolidation to put debt and deficit under control. That is actually something that France is committed to do in the context of the European fiscal procedures in accordance with the medium-term plan that France itself has produced. In our view, the path that has been put forward in that plan is enough to stabilize public debt towards the end of the decade. The news that there is a basis for a budget for 2026 in France is good. And at this point in time, it is up for the French political system to discuss the options to bring that forward.

Ms. Mossot: Thank you. Let us stay in the center. The lady with—can you stand up, yes. It is easier. Thank you.

Questioner: Thank you so much. Given that 15 percent is framed as a minimum tax to GDP ratio for growth at takeoff, I am really curious to understand what reforms, fiscal reforms especially, or even capacity building measures that the IMF would recommend, especially for emerging countries struggling with low revenue mobilization. Thank you.

Mr. Gaspar: Thank you so much. Actually, I am quite grateful for that question. We have put out recently a couple of papers looking at exactly that question—a working paper and a departmental paper with many more details.

So, we have been arguing for years that there is a tipping point in the tax to GDP ratio above which growth benefits from the role of state in development and a number of other favorable dynamics take hold. So, the idea is that tax capacity and taxation are fundamental to enabling the state to play its role in development. The working paper has a subtitle: Taxing for takeoff. What they show with very detailed time series analysis is that it is not only the tipping point that matters. What matters is what happens after you cross the tipping point and the countries that persevere cross the tipping point, and after a long period of time of ten years or more, approach 15 percent of GDP reap growth dividends but also broader benefits like improvements in public financial management, government effectiveness, and even the development of domestic bond markets.

How does this all take place? It seems to take place because when you pass a minimum in terms of your tax capacity, you have to rely more and more on voluntary compliance on the part of the taxpayer. And that requires a broad process of reform that gives the citizens of the country what the citizens of the country demand. And that triggers a virtual circle. I am actually very proud of our ability to found the 15 percent minimum level for the tax to GDP ratio.

Ms. Mossot: Next. The gentleman here on my right.

Questioner: Thank you. My question is about Latin America. The region still faces high public debt and high real interest rates. Does the IMF think the region is doing enough to reduce debt and stabilize public finances, especially as some countries face pressure to increase spending?

Ms. Mossot: Era.

Ms. Dabla-Norris: Thank you for your question. Latin American countries have indeed taken important steps to strengthen their fiscal positions, particular after what we saw during the pandemic. But I think it is important to underscore that public debt remains high in the region, and it is projected to remain broadly stable over the projection horizon.

Another key challenge facing countries is high real interest rates. That means that debt service costs tend to be higher, and they eat up a larger portion of the budget that could be used for other priority spending. So, our recommendation is that a more frontloaded consolidation would help Latin American countries bring down debt in a sustainable manner, build the buffers for the shocks that inevitably come, and create more resilience for their economies. Countries have made ambitious targets, but the time is really now to implement those targets.

Ms. Mossot: Let us go to this part of the room, the lady with the red jacket.

Questioner: In your presentation you noted that Nigeria currently is rated as moderate. Has IMF put into account Nigeria's new borrowing plans and what policy action would you advise to ensure the country remains in a safe place? Thank you.

Mr. Furceri: Currently what we are projecting for Nigeria is a neutral fiscal stance. We think that this neutral fiscal policy stance is also consistent in helping monetary policies to reduce inflation. Let me tell you more about the structural characteristics in terms of our recommendations to countries such as Nigeria. Our policy advice has been both on the revenue side, as well as on the spending side. I think on the revenue side, there is scope to improve revenue through reform to tax administrations to increase revenue mobilization in a way that does not hurt growth, for example, tax reform. And actually Nigeria has done quite a lot in the past years. I think like many of the laws that have been passed have tried to streamline tax codes. Tax expenditure has been reduced. The burden for business and low-income households has declined in terms of taxation. So, these are policies that go in the right direction.

On the spending side, there is scope on the one hand to improve the efficiency of spending. This is something we also talk about in the chapter—much gains can be achieved when countries improve the efficiency of spending, as well as the compositions, but also to increase social spending to address social vulnerability in the country.

Ms. Mossot: Thank you. Another one before we go online. The gentleman with the glasses in the fourth row.

Questioner: Thank you. As the UK government bonds seem to be particularly exposed to volatile movements in the bond markets, I just wonder if the UK is particularly vulnerable and if there is a reason for that. The IMF in its Article IV for the UK said that we should de-emphasize the second forecast made by the OBR every year. There is talk about actually scrapping it altogether. Would you endorse scrapping it rather than deemphasizing it? 

Ms. Mossot: Do we have other questions on the UK?  Can we take another one here in the middle?

Questioner: In your opening remarks, you talked about a negative fiscal feedback loop of some kind. There is a view in the UK that the fiscal rules which currently exist are too rigid and there is not enough headroom for safety purposes and all the time you are having to look at new revenue or budget cutting measures? Do you think those fiscal rules could be eased a bit or changed in some way to give the government more flexibility?

Ms. Mossot: I think we have the last one. Yes.

Questioner:  Given your projections for the UK tax burden and how you expect it to rise for the next few years, as well as public expenditure not slowing as sharply as other countries, do you think the UK is looking more like France than America when it comes to the tax burden and public spending?

Ms. Mossot: Thank you. Vitor, I guess you will be the one responding.

Mr. Gaspar: Absolutely. I was just trying to make sure that I do not forget questions. If you do not mind, I will start by giving you an overview of why we believe that fiscal risks are in general around the world more considerable than what they may seem. That is a message that we had in October 2024, but I think it still holds now, and it is important to look at risks in perspective.

There are three main reasons why public debt may be worse than it looks. First, spending pressures from underlying trends, they can be technological change, economic transformation, climate and demographics, and challenging politics at national, continental, and global levels are a factor.

Secondly, debt projections tend to be optimistic. They tend to underestimate how high public debt will rise. Last, increasing uncertainty is associated with economic, financial, and political development. That applies to the world. It applies to regions. It does apply to individual countries.

When it comes to the UK, our view is that the plans that have been put forward by the UK Treasury strike a good balance between providing favorable conditions for growth, and the emphasis on public investment is welcome in that regard and safeguarding fiscal sustainability. In our baseline, the public debt to GDP ratio will stabilize in the UK, albeit at a high level of 105 and a half percent of GDP. Please note that the concept that we use in our projections is gross general government debt, which is not the concept which is emphasized in the UK.

According to our concept as well, the budget deficit in the UK is projected to fall below 3 percent of GDP in 2028 and to continue to decline gradually.

We do see the UK as a country that benefits from liquid and deep bond markets with a diversified investor base, which is a signal of robustness.

Now, in our projections, I could not help but notice that when you compare with pre-pandemic projections, the higher public debt levels are there, but there is a very similar path for the primary surplus because higher interest payments have been compensated by adjustment in other items of spending.

You asked about the OBR and forecasts. Our view is that one, the cycle of budget decisions in the United Kingdom should emphasize yearly frequency. The evaluation of compliance with the fiscal rule should be annual as well. Forecasting should take place twice a year in accordance with past international practices.

I will not make bilateral comparisons between countries. And when it comes to fiscal rules, fiscal rules have to be adapted quite carefully to the specific conditions of the country—first and foremost the political circumstances of the country. And so, the degree of granularity of that debate recommends that it is done at the bilateral level, and so in the context of the engagement of the Area Department with the UK.

Ms. Mossot: Back to the room before we go online. The lady in the first row, please.

Questioner: I want to ask a question on China. The Fiscal Monitor kind of highlighted spending efficiency, and I was wondering what areas you think the Chinese authorities have more efficient measures and other areas that you think that need to be improved.

Ms. Mossot: Any other questions on China? The lady in the fourth row, please.

Questioner:  Actually, I want to follow up with a question about China and also, I want to ask a question about the pension reform like in general. I wonder how the Fund has observed any recent policy shifts in the pension system and how does the IMF assess the potential of the FICMI pension scheme to balance savings and consumption where it also will depend on the domestic capital market.

Ms. Mossot: Thank you. Vitor, it is for you again.

Mr. Gaspar: OK. So, it is very clear that China is managing a transition in its growth model and the future successful growth model for China will be emphasizing the endogenous sources of growth in China itself—the role of the domestic market. When it comes to the public sector—and I am answering both your questions—the emphasis should be much more on the quality of spending rather than the quantity of spending. For example, when it comes to infrastructure investment, one of the areas covered by the Fiscal Monitor, in China the infrastructure gap has been completely filled. At this point in time, when public investment is at stake, in China the upgrade in quality and the need to look at synergies and complementaries with the corporate sector is much more present.

Clearly one very important element where fiscal policy has a very important role to play is the decline in the very high savings rate of the household sector that helps in the short run to fend off risks of adverse debt deflation dynamics, but more importantly it is crucial for the capacity of the Chinese economy to grow in the medium to the long-term as well.

I had the privilege of participating yesterday in a panel about pension reform and the themes that you listed resonated quite a lot. Social safety nets, including social security, are crucial to creating conditions for a reduction in household savings. They allow, if designed in that direction, to mobilize capital that can help financial market development. And that in turn can support corporate innovation, corporate investment, and therefore foster synergies between the public and the private in China. I cannot go on any more than this.

Ms. Mossot: Thank you, Vitor. We go online with a question on the forecast for Portugal. Given the impact of RRF loans, what makes it possible to avoid a budget deficit in 2026? Then we will go—I think we have  Egypt, but first I think, Era, you can take this question from Portugal.

Ms. Dabla-Norris: Thank you so much. I should say on Portugal, the 2026 budget proposal was presented to Parliament on October the 10th. It is expected to pass with broad political support, which is very welcome. And the budget aims for near balance. This is supported by a very strong primary surplus. This sort of reinforces Portugal's commitment to sound public finances.

Portugal's public debt, which had actually peaked during the pandemic, is on a steady downward trend. It is projected to fall below 90 percent of GDP by end2026, so by the end of the next year, and further declines are expected over the medium term.

So, on the whole, the fiscal situation seems to have improved considerably since the pandemic, and Portugal is on a good track when it comes to public finances.

Ms. Mossot: Thank you. Can you hear us?

Questioner: Good morning, everyone. Thank you for taking my questions. I have a couple of questions. Globally as you said, Vitor, the global debt levels are on a rise, so what are the key drivers behind this innovative landscape? 

On the oil importers in developing countries, to what extent the debt level in this category could affect the development—the economic development plans in these countries? And for Egypt, the report shows that there is a downward path for the country's debt, so I want to ask about the key reasons behind this development. Thank you so much.

Mr. Gaspar: So, I will take the first and then I will pass on to Era.

Drivers of global debt developments. From a mechanical composition viewpoint, the countries that are pushing the global public debt ratio up are large countries. In my introductory remarks, I did list quite a number of members of the G‑20, and so you have these countries pushing the public debt level up. But let me dispel a possible misunderstanding. The situation concerning debt around the world is problematic in many places. And some countries that have relatively low public debt to GDP ratios happen to have also‑ very low public debt tolerance. And therefore, they may have quite significant risks associated with public debt. That is why in my introductory remarks I presented the map where you see the IMF staff assessment of public debt risks that we publish in our Article IVs. Era, to you.

Ms. Dabla-Norris: Just to add to Vitor's point, I think coming out of the pandemic, we have seen that fiscal positions in many parts of the world have not reverted back to where they were prior to the pandemic, and in some countries we see debt rising faster than even prior to the pandemic. Some of these are large economies. In others, we see debt stabilizing, but at the same time, we see that it remains above pandemic levels.

On Egypt specifically, Egypt achieved a primary surplus of about 2.5 percent of GDP in Fiscal Year 2024, 2025. And this was a result of a combination of measures, expenditure restraint, and some efforts to mobilize revenues, while at the same time, social protection was increased by 12 percent. So, overall debt we see has declined from about 96 percent to 86 percent of GDP over the year, and further reductions are expected by the end of the projection horizon. But I should add that the debt service burden in Egypt remains pretty heavy. Interest payments alone absorb about three quarters of revenue, so that limits fiscal space that is available.

Ms. Mossot: I will take the gentleman there and then we will come back to the center of the room.

Questioner: I have a follow-up question on Latin America, especially the biggest point is Brazil, the biggest question mark. Do you think there is an issue about debt sustainability in the medium term? Some say it is not sustainable. What is your take? And what is your assessment of the tax reform, especially the latest income tax reform? Thank you very much.

Mr. Gaspar: Thank you so much. When it comes to Brazil, we do see that Brazil is a country where the cost of serving public debt is extremely elevated. It was one of the countries where interest rates have risen in a more pronounced way and where the burden of debt service on budget is quite considerable. That being said, in our projections, we do see debt stabilizing in Brazil towards the end of the decade. We would recommend a path of adjustment for Brazil that would put debt on a more pronounced downward path.

When it comes to spending and revenues, we believe that in accordance with the theme of this Fiscal Monitor, improving the composition of government spending and improving the government spending efficiency would be important elements.

When it comes to the program of changing the tax system in Brazil, we have been engaging with the authorities, and we believe that the concern with the tax system is correct. And we will be reacting when we get a more specific view on details, and perhaps you will want to follow that with the Area Department. Era, I do not know if you have any comments.

Ms. Dabla-Norris: No.

Ms. Mossot: We will have the press briefing for each region of the world tomorrow and on Friday, so you can ask your questions there too. Back to the center of the room. The lady in the second row, please.

Questioner: I would like you to shed a little bit more light on the ASEAN region. How do ASEAN countries share similar challenges in order to improve the quality of spending? Are there any challenges that we have similarly? Is there any other way to work together in order to improve such quality of spending as an association, as a union, or as a region?

Ms. Mossot: Thank you. Era.

Ms. Dabla-Norris: Thank you for the question. The ASEAN region is a very diverse region. You have countries at very different levels of economic development with very different fiscal structures and very different levels of spending efficiency.

That said, there is room across the board to improve the quality of spending, and particularly the efficiency of spending when it comes to infrastructure, health, education, research, and development.

In the Fiscal Monitor, we highlight how emerging markets and developing economies could improve their output by closing efficiency gaps relative to best performers. So, you can get one third more value for money by spending in a more efficient manner.

When it comes to ASEAN in particular, trade integration is an important consideration because there is scope to do a lot more. So here harmonizing and considering practices, anticorruption practices, procurement laws, I think these are areas where spending efficiency could be improved across the region.

Learning from each other, I think the peer learning component is an extremely important one when it comes to the specific processes that countries are putting in place to strengthen public investment management or to improve the rule of law, to increase the accountability, to strengthen and have more open and competitive procurement systems. These are all areas where countries can also learn from each other in terms of how to improve spending efficiency.

Ms. Mossot: This side of the room. Sir, in the first row.

Questioner: Thank you. I would like to ask, how should fiscal policy address the risk of overheating in technological investment in order to avoid a new bubble in the dotcom like the one that happened in the 1990s and something that had been raised yesterday through the economic outlook press briefing. Thank you.

Mr. Gaspar: Thank you so much. What we emphasize in our communication during the Annual Meetings is the existence of financial vulnerabilities, including stretched asset valuations. From the viewpoint of fiscal policy, what we urge is governments to prepare in advance. Research that we conducted some years ago shows that countries that enter a financial crisis with sound fiscal buffers can in a sense support the economy and the financial system in the context of the crisis and therefore the costs on economic activity and employment are less and the recovery comes faster. That is one of the reasons why we think that fiscal action is urgent right now.

Ms. Mossot: We have the last one here, and then we will go back this time. The gentleman there with the white shirt.

Questioner: Two quick ones. You realize that more developed countries are looking internally at the serious cutting of donor funding. What should be the strategy for all of these developing countries in terms of—when your report talked about more efficient spending, how do they meet their capital needs, and expenditure needs whilst donor inflows are declining? Another quick one also on Ghana as well. Your program has helped us. The debt to GDP ratio has dropped significantly. What should we do to ensure we do not get back to any debt crisis that the program has sought to correct?  

Ms. Mossot: Thank you. Davide.

Mr. Furceri: Yes. I think the Fiscal Monitor has three main sorts of options to more broadly improve efficiency. One, as mentioned, there is strengthening institutions, strengthening the rule of law, addressing weak governance, and corruption when this is the case, strengthening public financial management process. These are very important lessons.

Another lesson which applies to many emerging markets is to create space for additional spending. This could be in particular for countries that face declining flows. All countries can create spending. Typically, advanced economies have more room to reduce spending pressures through pension reforms—while many emerging markets and low-income countries, the scope to improve and reform energy subsidy, something that we actually touch base in last year's report.

Finally, improving service delivery. And digitalization is a case where it can happen. Actually, in many countries, including in the African region, have adopted digitalization to strengthen, for example, revenue mobilization.

Now, with respect to Ghana, I think there are two important lessons that we learned. The first is strengthen revenue mobilization through improving tax administration to create resources for additional spending, including priority spending, including VAT. Second, strengthen public financial management to avoid payment of arrears, to increase debt transparency, and to keep the fiscal also in order, as we usually say. Thank you.

Ms. Mossot: Thank you. We have only three minutes. One very last question very quickly. The gentleman with the blue jacket in front. Very quickly. It is the last one.

Questioner: Thank you so much. Mr. Gaspar, to what extent from your perspective European plans to boost military and defense spending will impact its debt sustainability, and can you confirm that Europe really has necessary fiscal space to continue these programs in longer period of time? Thank you.

Ms. Mossot: In two minutes.

Mr. Gaspar: Very quickly. So, one of the pressures on public spending that we highlight is precisely spending on security and defense, and that is something that has to be accommodated in a way which is compatible with long run public debt sustainability and financial stability. The process of doing that in Europe is ongoing. Europe does have a very solid fiscal framework with rules and procedures. At this point in time, we believe that the set of European rules and procedures will deliver the needed fiscal sustainability and will contribute to financial stability.

Ms. Mossot: Thank you very much. I am really sorry for all the questions, but it is already almost the end of this Fiscal Monitor. Thank you so much, Vitor. Thank you, Era. Thank you, Davide. For all your questions, please follow up on media relations. We will get back to you as soon as we can.

There is -- as a reminder, there is the Managing Director’s press conference tomorrow morning at 8 a.m. Please join us and also for the press briefing for each region, Thursday and Friday. Thank you very much.

Mr. Gaspar: Thank you so much.