Press Release: Advanced Economies Need Long-Term Efforts to Tame Public Debt, IMF Studies Find

IMF News, September 1, 2010

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Canonical URL: Press Release: Advanced Economies Need Long-Term Efforts to Tame Public Debt, IMF Studies Find

General government debt in the G20 advanced economies surged from 78 percent of gross domestic product (GDP) in 2007 to 97 percent of GDP in 2009 and is projected to rise to 115 percent of GDP in 2015.
Public debt levels among advanced economies have reached levels not seen before in the absence of a major war.
Beyond the 2008-09 crisis, advanced countries’ indebtedness reflects persistent upward trends in debt ratios since 1974.
Rising spending on healthcare and pensions accounts for most of the weakening in primary balances.
Fiscal space—the distance between current debt levels and the debt limit beyond which a country’s debt becomes unsustainable based on past performance—is severely limited in some countries while others enjoy much greater room for fiscal maneuver.
The risk of debt restructuring in fiscally stressed advanced countries is judged to be significantly overestimated; the immediate problem is large primary deficits rather than spiraling debt service costs because public debt had long maturities at the beginning of the crisis.

Debt evolution and outlook:
- Persistent upward trends in debt ratios since 1974 among advanced economies.
- Surge in debt during the 2008-09 crisis.
- Projected rise to 115 percent of GDP in 2015 for G20 advanced economies.
Primary drivers weakening fiscal balances:
- Rising spending on healthcare.
- Rising spending on pensions.
Structural pressures:
- Aging societies.
- Global warming.
Behavioral implications:
- “Business as usual” will not restore sustainability; a fundamental change in behavior relative to historical patterns is needed.

Definition:
- Fiscal space is measured as the distance between current debt levels and the “debt limit” beyond which debt becomes unsustainable based on past performance.
Findings:
- Fiscal space is severely limited in some advanced economies and comparatively large in others.
- Maintaining significant margins of fiscal space is important because:
- There is uncertainty about where precisely the debt limits lie.
- Theory and empirical evidence suggest abrupt moves from full market access to market shutout can occur with little advance warning.
Policy implication:
- In countries with limited fiscal space, a fundamental break from normal fiscal adjustment patterns is needed to restore sustainability.

Thesis:
- Defaulting on debt would make little sense for fiscally stressed advanced countries given the nature of their problems.
Rationale:
- In prior decades, debt defaults were typically triggered by spiraling debt service costs in emerging markets.
- For advanced countries after the crisis, long maturities left debt service relatively contained; the central issue is large primary deficits.
Conclusion:
- The study judges that the risk of debt restructuring is currently significantly overestimated.

Fiscal adjustment design:
- Fiscal adjustment plans must be clearly defined to protect the fragile economic recovery, support growth and job creation, and provide reassurance to capital markets.
- Focus on gradual but sustained adjustment over the medium term rather than seeking a quick near-term tightening.
Long-term reforms:
- Tackle long-term drivers of public spending (notably healthcare and pensions) over the medium term to ensure fiscal sustainability.
Risk management:
- Target debt levels well below identified “debt limits” because governments may receive little or no warning about spikes in borrowing costs or curtailed access to markets.

Press Release No. 10/322, International Monetary Fund