IMF's Cottarelli Says Advanced Countries Need Medium-Term Deficit Plans
Advanced countries that based budget plans on optimistic growth forecasts need to spell out how they will meet deficit-reduction targets after 2011, the head of the International Monetary Fund’s fiscal department said.
“The first year is relatively easy because most of the adjustment that we have is simply the fiscal stimulus coming to an end,” Carlo Cottarelli, a former Bank of Italy economist, said in an interview July 13 in Washington. “What is missing is the medium-term perspective.”
President Barack Obama and other Group of 20 leaders agreed in June to halve their budget deficits by 2013. While the plans will narrow gaps by an average of 1.25 percentage points of gross domestic product in 2011, Cottarelli urged governments to instill confidence that “adjustment will continue in the following years” after stimulus programs end.
European countries from the U.K to Germany, after having to craft an emergency backstop worth almost $1 trillion to stop the Greek debt crisis from spreading, have announced budget cuts. Spain and Portugal, under rising market pressure, have already implemented measures such as reductions in public workers’ wages and rising taxes on high-income earners.
Cottarelli, who last month published with IMF chief economist Olivier Blanchard a “Ten Commandments” for fiscal adjustment, said developed countries including the U.S. have built their deficit-reduction plans on more optimistic growth forecasts than those of the IMF.
As a result, “in order to achieve the same nominal targets you would need more measures,” he said.
The IMF, in a staff report yesterday, said Japan’s plan to balance its budget in 10 years would be more credible if the government was specific about how it will boost revenue, including details on a sales-tax increase.
Adding to the potential difficulties, many developed nations haven’t yet addressed the issue of rising spending for health care and pensions systems, Cottarelli said.
The IMF, which is providing about a quarter of a 110 billion-euro, European-led loan for Greece and is part of a financial backstop for the euro region, has been urging governments to cut public debt to prevent higher interest rates and slower economic growth.
Yields on debt of so-called peripheral economies of Europe are reflecting some “overreaction” among investors to the countries’ fiscal situation even as they take steps to narrow deficits, Cottarelli said.
The extra yield investors demand to hold 10-year debt from Spain rather than German equivalents is still more than five times the daily average spread of the past five years.
For the first time since getting bailed out in May, Greece this week sold treasury bills at an interest rate below the 5 percent charged by the European Union.
Still, Greek debt still shows elevated concern about default. Ten-year bonds yield 766 basis points more than German bunds. While that’s down from a record 965 basis-point spread on May 7, just before the EU-IMF regional rescue was announced, it’s about three times the average since the failure of Lehman Brothers Holdings Inc. in September 2008.
Greece has adopted budget cuts and additional revenue- raising measures worth more than 14 percent of GDP as part of conditions to secure the loan and said last week it may beat a target to reduce the budget deficit.
The U.S., which the IMF sees posting a deficit of 11 percent of GDP this year, has enjoyed stronger economic growth than Europe, making investors less concerned about its fiscal outlook, Cottarelli said.
U.S. Treasuries gained 2.1 percent in the two months before the European rescue plan, according to bond indexes from Bank of America Corp.’s Merrill Lynch unit. Since then, U.S. government debt has returned an additional 2.2 percent as investors continue to seek safe assets amid concerns that global economic growth will slow.
Still, keeping U.S. debt at high levels would hurt the economy over the longer term, Cottarelli said.
“The status of a reserve currency is not something that can be decided by law,” Cottarelli said. “You can have it for some time but you cannot abuse it. This is why fiscal adjustment will have to take place in the U.S. like other countries.”