Most advanced nations are making progress in narrowing deficits even as global growth slows, while the U.S. and Japan must set out clear policies to reduce debt at a sustained pace, the International Monetary Fund said.
Fiscal shortfalls in advanced economies will narrow to an average of 5.9 percent of gross domestic product this year and 4.9 percent in 2013, from 6.6 percent in 2011, the IMF predicted in its semi-annual Fiscal Monitor report released in Tokyo today. The forecasts are higher than in July, when it estimated deficits to average 5.8 percent of GDP in 2012 and 4.7 percent next year.
Governments from the euro area to New Zealand are cutting spending to shrink budget deficits after boosting relief measures to weather the global recession and the financial crisis that began in 2007. Efforts to rein in expenditures have been met with concerns that support may be withdrawn before there is evidence of an accelerating, broad-based recovery.
“Most countries have made significant headway in rolling back fiscal deficits,” with gaps expected to be at or lower than pre-crisis levels for about half of the economies tracked in the fiscal monitor report, the IMF said. “The improvement in fiscal balances is most pronounced in advanced economies, where the fiscal shock was larger, followed by emerging market economies and to a lesser extent by low-income countries.”
In a separate report released earlier today, the IMF lowered its forecasts for global growth this year and next. The world economy will expand 3.3 percent in 2012, the slowest since the 2009 recession, and 3.6 percent next year, it predicted, and said it sees “alarmingly high” risks of a steeper slowdown, with a one-in-six chance of growth slipping below 2 percent.
Advanced economies cannot afford to slow efforts to reduce debt levels even as the global recovery falters, compared with emerging markets or low-income countries that can pause and await “a more hospitable growth outlook,” the fund said.
“With relatively stronger fiscal positions, many emerging-market economies have opted to put fiscal consolidation on hold in the face of weakening demand and increased financial uncertainty,” the Washington-based lender said.
Fiscal vulnerabilities remain elevated even as nations make “substantial” progress in reducing debt, the IMF said. Still, partly because of the liquidity provided by central banks, markets have in most cases taken the increased levels in their stride, with “solvency concerns remaining elevated only for a subset of euro area countries,” the fund said.
European nations that are under market pressure are implementing “further significant fiscal consolidation,” the IMF said. While Spain has raised indirect taxes and cut public wages and jobless benefits, initial data for the first half of 2012 show little progress in fiscal consolidation and the risk of missing its full-year deficit target has increased, it said.
A deeper-than-expected recession in Greece and slippages in the implementation of fiscal measures will make it difficult to achieve its ambitious deficit reduction targets, the fund said.
European finance ministers met in Luxembourg yesterday to discuss Spain’s overhaul effort and closer banking cooperation. German Chancellor Angela Merkel will make her first visit today to Greece since the turmoil began in 2009.
For the U.S. and Japan, the IMF said there remains a lack of clear fiscal policies to tackle large public imbalances at an “appropriately sustained pace.”
The IMF forecasts the U.S. shortfall will narrow to 8.7 percent of GDP in 2012 and 7.3 percent next year, predictions that it said assumes a political compromise will be reached to avoid a “fiscal cliff” of a sudden decline in deficits.
“In the U.S., the deficit would decline by more than 4 percent of GDP if the Bush tax cuts were left to expire and programmed automatic spending cuts were allowed to take hold,” the IMF said. “An even larger adjustment would be needed if the federal debt ceiling were not raised in a timely fashion.”
Japan’s borrowings will balloon to 245 percent of economic output next year, compared with Greece’s projected 182 percent, the IMF estimates. The parliament in August ratified legislation doubling the 5 percent consumption tax in 2015 as part of Prime Minister Yoshihiko Noda’s effort to curb the world’s heaviest debt load, an increase that will not be sufficient to put the record-high debt ratio on a “downward path,” the IMF said.
China may resume “modest consolidation” of its fiscal balance next year as growth recovers, while India needs more substantial subsidy reform to achieve its plan to narrow its deficit, according to the report.