Budget deficits in most advanced economies will decline this year from 2011 levels even as the outlook for the global economy calls for more moderate growth, the International Monetary Fund said.
Shortfalls in developed nations will contract by about one percentage point of gross domestic product in 2012, the Washington-based lender said today in its semi-annual Fiscal Monitor report. The IMF warned that the goal of smaller deficits in the medium term should not curtail growth now.
Many countries relied on government-relief measures to weather the global recession and the financial crisis that began in 2007, creating or deepening unsustainable budget deficits. Efforts to rein in spending have been met with concerns that support may be withdrawn too quickly before there is evidence of accelerating, broad-based growth.
“Fiscal risks are declining but they are still very high,” Carlo Cottarelli, director of the IMF’s Fiscal Affairs Department, said today in a news conference in Washington. “With regard to six months ago there has been some reduction to risks. The risks are still elevated in advanced economies. What is needed is a steady but gradual adjustment.”
Cottarelli said that “some countries like the United States and Japan need to clarify their plans to reduce public debt in the medium term.”
The world economy will expand 3.5 percent this year, down from 3.9 percent in 2011, the IMF said today in a separate report. Growth in developed nations will slow to 1.4 percent from 1.6 percent last year.
Budget deficits in emerging markets will account for 2.1 percent of GDP this year, compared with 5.7 percent in advanced economies. The IMF forecast that shortfalls in advanced economies will narrow to 4.5 percent of output in 2013, underscoring a steady decline since 2009 when deficits accounted for 8.9 percent of GDP.
Fiscal consolidation efforts in the euro area will shrink budget deficits in the region from 4.1 percent of GDP last year to 3.2 percent in 2012 and 2.7 percent the following year, according to IMF projections.
“In the short to medium term, many countries remain vulnerable to unexpected shocks, leaving them with little margin for policy errors,” the IMF said. “Although debt ratios are expected to begin stabilizing by 2015 in the large majority of countries, the risk of a setback is high.”
The U.S. will post the second-largest budget deficit among Group of Seven economies this year at 8.1 percent of GDP, behind Japan’s 10 percent, according to the report.
“In the United States, any credible strategy will need to include entitlement reforms to address the growth of age-related spending, but other spending cuts, as well as revenue measures, will also be needed,” the IMF said. “Large central bank holdings of government debt and other assets will need to be liquidated or rolled over to the private sector as the demand for base money returns to more normal levels,” the IMF said, referring to all central banks.
The borrowing needs of wealthy nations are projected to level off before retreating in 2014, with Japan’s remaining the largest at 59 percent of this year’s gross domestic product, according to the IMF. Among emerging economies, Pakistan’s needs will be 30 percent this year and next.