The International Monetary Fund urged nations to cut budget deficits, saying deflationary concerns, weak growth prospects and rising borrowing costs threaten to undermine fiscal balances.
While Europe is most exposed to the risk of a sustained period of ultra-low inflation, the U.S. Federal Reserve also saw its preferred gauge of price changes remaining below its 2 percent target for almost two years. The IMF has termed such developments “low-flation” and is calling on countries to take action to prevent it from hurting output and reducing governments’ ability to repay debts.
“In most countries, persistently high debt ratios continue to cast shadows over the medium term,” the Washington-based IMF said in its Fiscal Monitor report released today. “Risks to fiscal forecasts remain mostly on the downside, reflecting weak growth prospects, medium-term policy uncertainty, and persistent deflationary concerns with potentially deleterious impacts on debt dynamics” and budget results, it said.
In the U.S., a bipartisan budget agreement in December failed to place debt and public finances on a sustainable path over the long term, the IMF said. In Japan, questions remain about the second stage of the consumption-tax rate increase next year and the medium-term fiscal strategy beyond 2015.
The IMF raised the forecast for Japan’s debt as share of gross domestic product to 243.5 percent this year from 243.2 percent in 2013. The fund said the U.S. deficit will be 1.8 percentage points larger in 2014 than previously expected as a share of the economy, after accounting for some previously excluded expenditures.
The IMF estimates advanced economies will cut their deficit-to-GDP levels by almost half to 3.4 percent in 2014 from 6.5 percent in 2009, on a cyclically adjusted basis. Still, more reduction is needed, the fund said.
“The normalization of global liquidity conditions has begun to raise borrowing costs and financial volatility, giving yet greater urgency to fiscal consolidation,” the fund said. “Particularly where deficits and public debt have remained stubbornly high.”
The asset-quality review and bank stress tests in Europe may reveal need for further public support in some countries, according to the IMF. Still, in several European economies, including Belgium, Ireland and Portugal, gross financing needs have declined and financial pressures are abating.
Among the emerging economies, only a few high-deficit countries, including Jordan and Morocco, strengthened their primary fiscal positions in 2013.
“Most countries continued to postpone consolidation and some saw their fiscal deficits deteriorate,” the fund said, listing Egypt, Hungary, Nigeria and Russia.
“In addition, fiscal vulnerabilities have built up at the subnational level in several large emerging economies,” the IMF said, citing Brazil and China.
Upcoming elections could create additional pressures on public spending in the Middle East, North Africa, Brazil, Indonesia, Romania, South Africa and Turkey.
“Decisive fiscal consolidation is needed in some emerging-market economies to reduce vulnerabilities,” the fund said. “Otherwise, if the external environment were to deteriorate markedly, countries under market pressures could be forced to resort to procyclical budget tightening.”