The IMF and the UN labor agency are urging advanced economies not to cut government spending before next year, warning that a move to tighten fiscal policies could hurt the global recovery.
“As a general strategy, most advanced economies should not tighten their fiscal policies before 2011, because tightening sooner could undermine recovery,” the agencies said in a policy paper issued ahead of a joint conference in Oslo later this month.
Several European governments have begun cutting their spending in recent months, after Greece found itself on the brink of bankruptcy and had to be rescued by the EUand the IMF.
However, the IMF and the International Labour Organization noted that fiscal consolidations of 1 percent of GDP typically reduce domestic consumption and investment by about 1 percent, and raise the unemployment rate by about 0.3 percentage points over two years.
“A more severe consolidation would stifle domestic demand that is still weak,” they said in the report.
At the same time, the agencies said that governments should look at withdrawing subsidies for short-time work — a measure that was introduced during the economic crisis — as this could prove to be costly.
“During a severe recession and in early stages of a recovery, these costs are usually of secondary importance; however, they are likely to become more salient in recovery periods, suggesting that the subsidies should start to be phased out in 2011,” they said.
Rather, policies should focus on keeping the unemployed in touch with the labor market, for example, by requiring that unemployment benefits be only issued to those who undergo training or take up social work, they said.
The IMF-ILO conference on Sept. 13 in Oslo will discuss ways to bring about a “sustainable, job-rich economic recovery.”
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