High Debt Hampers Countries’ Response to a Fast-Changing Global Economy

IMF Blog, April 10, 2019

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Authors: Vitor Gaspar, John Ralyea, Elif Ture
Published: April 10, 2019

Overview

Authors: Vitor Gaspar, John Ralyea, Elif Ture
Date: April 10, 2019
Economic growth is slowing and public debt remains high across the world amid demographic changes and technological advances that reshape the global economy.
Governments’ tax and spending choices determine education, job prospects, healthcare, and retirement outcomes as they respond to these challenges.
The new Fiscal Monitor argues for a long-term view: gradually lowering debt to prepare for the next downturn and upgrading fiscal policy to invest in people’s futures by reallocating spending, creating more budget room, and improving tax policy.

Preparing for the next downturn

High debt restricts policymakers’ ability to increase spending or cut taxes in downturns because creditors may be less willing to finance larger budget deficits.
Interest payments on debt crowd out spending on education, health, and infrastructure—investments that support long-term growth.
Country-specific guidance:
- Countries with high debt should increase revenues or curb excessive spending.
- Particular attention where current economic growth exceeds long-run potential growth (example: the United States) or where borrowing costs are high and financing needs are large (examples: Brazil and Italy).
- Countries with less financing concern (examples: Germany and Korea) could increase investment in infrastructure or education to support near-term economy and foster inclusive growth over the next few decades.
Maintain investments in education, health, and infrastructure by reprioritizing spending or broadening the tax base (for example, removing tax exemptions and improving tax administration).

Investing in people’s futures

Demographic shifts and new technologies profoundly affect economic growth and the distribution of incomes and wealth, and they also impact public finances.
Projections and implications:
- In advanced economies with rapidly aging populations, age-related public spending, such as pensions and healthcare, is projected to consume a quarter of GDP by 2050.
- Emerging market and low-income developing economies have much younger and faster-growing populations and will require additional public spending to make progress toward the UN Sustainable Development Goals on infrastructure and public services.

Upgrading fiscal policy: three fronts

Shift spending
- Reallocate spending toward growth-enhancing investment in infrastructure, education, and healthcare.
- Cut wasteful spending, such as inefficient energy subsidies.
- Example: Gradually removing fuel subsidies, while protecting the most vulnerable, could provide up to 4 percent of global GDP in additional resources for investment in people and growth.
- Emphasize lifelong learning and continuous skills upgrading (examples: Singapore’s training grants to all adults; the Netherlands’ tax deductions for workforce training).
- Curbing corruption would raise additional resources and reduce waste (see Fiscal Monitor Chapter 2).
Create more room in the budget
- Improve public financial management and raise revenues to create fiscal space.
- Example: In advanced economies, better management of government financial assets could yield up to 3 percent of GDP a year in additional revenue (October 2018 Fiscal Monitor).
- Example: Sub-Saharan African countries could raise, on average, 3 to 5 percent of GDP in additional revenue over the next five years by improving the efficiency of current tax systems.
Improve tax policies
- Advanced economies should return to more progressive income taxes to help reduce inequality.
- Most advanced economies have room to raise revenue significantly from taxing inheritances, land, and real estate.
- Governments should cooperate to reform taxation of large multinational corporations, particularly digital ones, to limit profit-shifting and global tax competition and to raise revenues, including for low-income developing countries.

Key findings and policy recommendations

Gradually lower public debt to prepare for future downturns while protecting and prioritizing growth-enhancing public investment.
Reallocate spending toward education, healthcare, and infrastructure; cut inefficient subsidies and waste.
Improve tax administration and broaden tax bases (remove exemptions) to increase revenues.
Improve management of government financial assets to yield significant additional revenue in advanced economies.
Increase revenue collection in emerging market and low-income developing economies (potential gains cited: 3 to 5 percent of GDP for sub-Saharan Africa over five years).
Return to more progressive taxation in advanced economies and tax inheritances, land, and real estate where feasible.
Cooperate internationally to reform taxation of large multinational (digital) corporations to reduce profit-shifting and raise revenues globally.
Promote lifelong learning and workforce training policies to adapt to technological change; protect the vulnerable during subsidy reforms.

Source: IMF blog post “High Debt Hampers Countries’ Response to a Fast-Changing Global Economy,” Vitor Gaspar, John Ralyea, Elif Ture, April 10, 2019.

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High Debt Hampers Countries’ Response to a Fast-Changing Global Economy

Source details

Other formats

Bibliographic details

Overview

Preparing for the next downturn

Investing in people’s futures

Upgrading fiscal policy: three fronts

Key findings and policy recommendations

Content in this bundle

References