IMF warns of rising debt

09:50, March 22, 2010      

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Developed countries with big budget deficits must start to prepare now for the belt-tightening that will be needed starting next year, the No. 2 official at the IMF said Sunday.

John Lipsky, the International Monetary Fund's first deputy managing director, told the China Development Forum Sunday that gross general government debt in the advanced economies will rise from an average of 75 percent of GDP at end-2007 to 110 percent of GDP at end-2014, even assuming that temporary, crisis-related stimulus steps are withdrawn in coming years.

"Addressing this fiscal challenge is a key near-term priority, as concerns about fiscal sustainability could undermine confidence in the economic recovery," Lipsky said.

Already this year, the average ratio in advanced economies is expected to reach the levels seen in 1950, after World War II, he said.

Reducing the ratio to the pre-crisis average of 60 percent by 2030 would require raising the structural primary balance – before interest payments – from a deficit of about 4 percent of GDP in 2010 to a surplus of about 4 percent of GDP in 2020 and keeping it at that level for the following decade.

In order to achieve that, Lipsky painted a daunting picture of the tightening needed to restore public finances to health.

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, according to Lipsky.

"This would by itself represent a huge effort, but in fact any primary surplus improvement in the coming years will have to be accomplished while swimming against the already rising tide of entitlement expenditures on healthcare and retirement."

For most advanced economies, maintaining fiscal stimulus in 2010 remains appropriate, but consolidation should begin next year if the global recovery remains on track.

"We have estimated that maintaining public debt at its post-crisis levels could reduce potential growth in advanced economies by as much as 0.5 percentage point annually compared with pre-crisis performance," he added.

But unwinding the anti-crisis stimulus measures would contribute only 1.5 percent of GDP to the fiscal adjustment.

"Thus, just keeping debt ratios at a post-crisis level will require new policy action," Lipsky noted.

Source: Global Times
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