Advanced economies face “acute” challenges in tackling high public debt and unwinding existing stimulus measures will not come close to bringing deficits back to prudent levels, said John Lipsky, first deputy managing director of the IMF.
All G7 countries, except Canada and Germany, will have debt-to-GDP ratios close to or exceeding 100 percent by 2014, Lipsky said in a speech yesterday at the China Development Forum in Beijing. Already this year, the average ratio in advanced economies is expected to reach the levels seen in 1950, after World War II, he said, adding the government debt ratio in some emerging market countries had reached a “worrisome level.”
“This surge in government debt is occurring at a time when pressure from rising health and pension spending is building up,” Lipsky said.
Stimulus measures account for about a 10th of the projected debt increase, and rolling them back won’t be sufficient to bringing deficits and debt ratios back to prudent levels.
Maintaining public debt at its post-crisis levels could cut potential growth in advanced economies by as much as half a percentage point annually compared with pre-crisis performance, the IMF official said.
The Washington-based IMF, which rescued countries such as Pakistan and Iceland during the global recession, expects global growth of about 4 percent this year and a somewhat faster pace next year, reflecting expansionary fiscal and monetary policies, he said.
Growth-enhancing reforms such as liberalization of goods and labor markets, as well as the removal of tax distortions, should be pursued vigorously, Lipsky said.
Besides this, the bulk of the needed debt reduction should be focused on reforms of pension and health entitlements, containment of other primary spending and increased tax revenues, and improving both tax policy and tax administration measures.
Lipsky said for most advanced economies maintaining fiscal stimulus this year remains appropriate. Still, fiscal consolidation should begin next year if the recovery occurs at the projected pace. Some actions should be undertaken now by all countries that will need fiscal adjustment, he said.
Lipsky said it was “fully appropriate” for China to maintain its fiscal stimulus through this year, while seeking to rein in its rapid loan growth. He said fiscal consolidation will be appropriate in the US, where a higher public savings rate would be required to ensure long-term fiscal sustainability.
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