IMF cautions developed nations face fiscal test
By Alan Wheatley |
March 22, 2010, Monday
|
Print Edition
Print Edition
DEVELOPED countries with big budget deficits must start now to prepare public opinion for the belt-tightening that will be needed starting next year, the No. 2 official at the International Monetary Fund said yesterday.
John Lipsky, the IMF's first deputy managing director, said the scale of the adjustment required was so vast that it would have to come through less-generous health and pension benefits, spending cuts and increased tax revenues.
"Addressing this fiscal challenge is a key near-term priority, as concerns about fiscal sustainability could undermine confidence in the economic recovery," Lipsky told the China Development Forum, which is held in Beijing from Saturday through Tuesday.
"Already in several countries with particularly high debt and deficits, sovereign risk premiums have risen sharply, imposing strains for the countries affected and raising risks of possible broader spillovers," he said in remarks prepared for delivery to the conference.
For most advanced economies, maintaining fiscal stimulus in 2010 remains appropriate, but consolidation should begin next year if the global economic recovery remains on track.
First, policy makers should already be making it clear to their citizens why a return to prudent policies is a necessary condition for sustained economic health, Lipsky said.
The IMF estimates that, by raising real interest rates, maintaining public debt at its post-crisis levels could reduce potential growth in advanced economies by as much as half a percentage point annually.
Second, fiscal institutions must be strengthened to withstand adjustment fatigue. Options include reinforcing fiscal responsibility legislation and improving tax collection.
Third, entitlement reforms such as increases in the retirement age would have favorable long-term fiscal effects but do little near-term damage to aggregate demand, Lipsky said.
John Lipsky, the IMF's first deputy managing director, said the scale of the adjustment required was so vast that it would have to come through less-generous health and pension benefits, spending cuts and increased tax revenues.
"Addressing this fiscal challenge is a key near-term priority, as concerns about fiscal sustainability could undermine confidence in the economic recovery," Lipsky told the China Development Forum, which is held in Beijing from Saturday through Tuesday.
"Already in several countries with particularly high debt and deficits, sovereign risk premiums have risen sharply, imposing strains for the countries affected and raising risks of possible broader spillovers," he said in remarks prepared for delivery to the conference.
For most advanced economies, maintaining fiscal stimulus in 2010 remains appropriate, but consolidation should begin next year if the global economic recovery remains on track.
First, policy makers should already be making it clear to their citizens why a return to prudent policies is a necessary condition for sustained economic health, Lipsky said.
The IMF estimates that, by raising real interest rates, maintaining public debt at its post-crisis levels could reduce potential growth in advanced economies by as much as half a percentage point annually.
Second, fiscal institutions must be strengthened to withstand adjustment fatigue. Options include reinforcing fiscal responsibility legislation and improving tax collection.
Third, entitlement reforms such as increases in the retirement age would have favorable long-term fiscal effects but do little near-term damage to aggregate demand, Lipsky said.
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