Advanced economies face high interest rates and market
turbulence unless they take radical measures to reduce
ballooning government debt burdens, the IMF has warned.
All the advanced economies, except Canada, will have a debt
ratio of more than 90% and this is a new and
different situation for the world, Carlo Cottarelli, head
of IMF fiscal affairs department, told Emerging
Markets in Istanbul yesterday.
Over the past two years, rich nations have embarked on a
deficit-financed fiscal stimulus to raise demand amid a
collapse of consumption and investment. Meanwhile, revenues
The IMF has projected that advanced countries public
debt would balloon by a further 40% of GDP between 2007 and
2014 unless action is taken. Only 5% of the increase is
expected to come from the interventions in the financial
Cottarelli said a withdrawal of fiscal stimulus may be
premature as the global economy looks fragile, but urged a
timely and transparent road map for fiscal consolidation.
The G20 communique noted the need to formalise fiscal
exit strategies and not yet to implement them, but I dont
think there has been a clear definition by governments on how
they are going to tackle the problems, he said.
He was concerned that as global savings rates decrease while
governments carry huge debt burdens, short- and long-term
interest rates could rise unexpectedly.
Now interest rates are low, because private-sector
demand is weak but the longer you wait to fix
public finances the more difficult it gets, he argued.
The effects [of interest rate increases] may not be large
initially, but they may rise rapidly.
The IMFs economic counsellor and research director
Olivier Blanchard told Emerging Markets that, if
fiscal crises were to develop, this could force governments to
undertake painful structural reforms that they have
been reluctant to make up to now.
Blanchard said that such reforms could include the need to
adjust social security and health system burdens. He did not
elaborate, or say which countries could be involved, but these
are key issues for leading economies including the US, Japan
and even China at present.
Cottarelli argued that to avoid a fiscal crisis,
governments need to slash public spending commitments. Advanced
economies should seek to bring down debt to GDP levels to 60%
over the next 20 years, he said. To achieve this, the primary
fiscal balance the budget before debt servicing costs
needs to move from a 3.5% deficit to a 4.5% surplus in
the next ten years, and then be frozen for the next
Governments can save 1.5% of GDP by simply not renewing
stimulus measures, he said. A further 3.5% of fiscal
improvement can be achieved by freezing public spending in real
terms and key reforms are needed to offset higher
spending demands on health and pensions by aging
populations. Finally, a 3% structural tax increases,
perhaps by looking at carbon taxes, should be implemented.
Cottarelli feared government deficits would crowd out the
capital available for private sector expansion once the
composition of the economic recovery is biased towards
private-led investment and consumption. Once demand
recovers, there will be a crowding out problem for the private
sector as well as sovereign borrowing for emerging