Deputy Managing Director Murillo Portugal participated in the panel discussions and delivered the opening address at the conference (IMF photo)
Fiscal issues
That was the key conclusion of a high-level conference on “Exiting from High Public Debt” that was recently held at the IMF’s Paris offices.
The conference, cosponsored by the IMF’s Fiscal Affairs Department and the Fund’s Offices in Europe, brought together central bank and finance ministry officials from 28 European countries, along with representatives from the European Commission, international financial institutions, think tanks, the private sector, and academia.
The discussion on high debt levels comes at a time when attention is now shifting to focus on the unprecedented size of the stimulus measures that were needed to rescue economies worldwide, as well as how and when governments can begin to rein in spending.
In a recent IMF blog post, Marek Belka, Director of the IMF’s European Department wrote, “Much is riding on getting the timing of the exit right from the stimulative policies used to combat the global economic and financial crisis. Exiting too early may jeopardize the recovery. But exiting too late may sow the seeds for the next crisis.”
Recovery underway, but fragile
There are signs that the global economy is recovering faster than expected in response to these unprecedented government stimulus efforts. Speaking in Hong Kong the day following the conference, IMF Managing Director Dominique Strauss-Kahn said, “The global recovery appears to be stronger than previously anticipated. However, the situation remains fragile and recovery is proceeding at different speeds in various regions.”
At the conference, participants voiced similar words of caution, recognizing that continued vigilance against a double-dip recession is essential. Yet they also said that it is crucial in the medium term to exit from the high levels of public debt taken on in the stimulus effort.
New risks apparent
In an opening address to the conference, IMF Deputy Managing Director Murillo Portugal said that public debt in the advanced G-20 economies could reach the equivalent of 118 percent of gross domestic product by 2014, which would be 40 percentage points above pre-crisis debt levels. By contrast, Portugal said, public debt levels in the emerging market G-20 countries are projected to fall to below 40 percent of GDP next year, reflecting lower initial debt levels, projected faster growth, and earlier withdrawal of fiscal stimulus measures.
“Governments need to design and announce detailed and credible strategies regarding how to bring their debts down, and implement now reforms that can strengthen public finances in the long term without weakening demand in the short run,” Portugal said. “This is a tall order. But governments rose to the challenge posed by the crisis, and we are seeing the fruits of these efforts in the nascent recovery. Now they must respond with equal resolve to the challenges the crisis will leave in its wake.”
Conference participants said there is a danger that in time the high debt levels in the advanced economies will lead to higher interest rates and crowd out private sector activity. Higher levels of public debt can have a negative impact on potential economic growth and reduce governments’ ability to respond to future crises with expansionary fiscal policies, leaving them in a riskier position.
Conference sets framework
Participants in the conference agreed that exit strategies should be based on medium-term plans that limit public spending as private demand recovers. They emphasized the importance of medium-term fiscal frameworks, fiscal responsibility laws, fiscal rules, and fiscal councils.
Those elements of the exit strategy that will not have a negative impact on demand in the near term—especially pension and health care reforms to lower the costs associated with population aging in the future—should be implemented now, as their benefits will take time to materialize.
There was broad agreement among participants that while the use of expansionary fiscal policies has been appropriate, debt ratios will need to be restored to more appropriate levels over time.
“The public debt to GDP ratio cannot increase indefinitely,” said IMF Fiscal Affairs Department Director Carlo Cottarelli. “The goal should be to reduce debt levels to where they were before the crisis.”
