The head of the IMF has warned of an “unforgiving” economic backdrop for government finances around the world as she highlighted a widespread reluctance among politicians to rein in spending and raise taxes, Report informs referring to the Financial Times.
Kristalina Georgieva, the fund’s managing director, said rising levels of borrowing meant a growing share of government revenues was being used to cover interest payments, while “lackluster” growth heightened the challenge of curbing debts.
“Our forecasts point to an unforgiving combination of low growth and high debt — a difficult future,” said Georgieva.
Countries faced “high and rising public debt — way higher than before the pandemic”, she added, even after a fall in debt-to-GDP levels as inflation lifted nominal growth. The managing director’s remarks ahead of next week’s IMF and World Bank annual meetings come as global public debt heads to a record $100 trillion by the end of 2024. Borrowing surged during the early stages of the coronavirus outbreak as economies were locked down. Many governments, including those of the world’s largest economies, are yet to bring spending under control.
The US is still running substantial budget deficits, while China’s government has recently pumped funds into the economy in an effort to support weak growth. The IMF confirmed the world’s two largest economies were driving the global rise, in findings published this week. But in prepared remarks, Georgieva also highlighted a “frightening evolution” in emerging and low-income countries, as more government income is set aside to honor debt-servicing commitments. Georgieva said governments needed to lower debt and rebuild fiscal buffers to cope with potential economic shocks — something the managing director said “will surely come, and maybe sooner than we expect”.
Separate IMF research showed that discourse from politicians “increasingly favors fiscal expansion” rather than contraction, Georgieva said, increasing the hurdles to reining in debt. A paper covering 65 countries and drawing on more than 4,500 manifestos from 1960 to 2022 points to a proliferation of policy proposals that tend to expand government spending. The share of discourse pointing to a fiscal expansion has increased 40 percent across both advanced and emerging economies over the past three decades. Political discourse focusing on fiscal “restraint” had more than halved since its 1980s peak in advanced economies, the paper said.
“Even the traditionally fiscally conservative political parties are developing a taste for borrow-to-spend,” Georgieva said.
In her speech, Georgieva said there had been some good news, most notably the global retreat of inflation, which had not been accompanied by a recession. Both the US and euro area labor markets are “cooling in an orderly manner”. However, the once-in-a-generation inflationary shock a few years ago would have enduring effects on household incomes, Georgieva warned.
This is on top of continued geopolitical tensions, including the worsening conflict in the Middle East. Growth, meanwhile, is set to be lackluster, according to the IMF, which in July predicted a global expansion of 3.2 percent in 2024 and 3.3 percent in 2025. “Budgets need to be consolidated — credibly, yet gradually in most countries,” said Georgieva. “This will involve difficult choices on how to raise revenues and make spending more efficient, while also making sure that policy actions are well explained to earn the trust of the people.”