Credibility of public finance
The International Monetary Fund (IMF) released its Fiscal Monitor report from October pointing out how governments face fiscal policy trade-offs, as they should prioritize protecting vulnerable groups through targeted support, while keeping a tight fiscal stance to help reduce inflation, in a context where households are struggling with elevated food and energy prices, raising the risk of social unrest.
Main take aways from the IMF´s report:
- Increasing pressure on public budgets: In 2021 and 2022, fiscal deficits have fallen sharply in advanced and emerging market economies but remain larger than prepandemic levels. Global government debt follows a similar trend and according to the IMF is projected to be 91% of GDP in 2022, which is about 7.5 p.p above the prepandemic levels, despite the recent reduction in the ratio for many countries. Inflation has contributed positively to reduce public deficits and public debt ratios but looking forward interest expense relative to GDP will rise over the coming years even as debt stabilizes.
- Fiscal policy needs to adjust as governments operate within tighter budgets: Countries have implemented public support measures, including price subsidies, tax cuts, and cash transfers to help households. According to the IMF estimates, in most countries, the announced measures cost more than 0.5% of GDP reflecting in part insufficient targeting. Defining a consistent medium-term policy framework for the post pandemic world is crucial. Reducing deficits, which will require making spending priorities, is necessary to help tackle inflation, and to address debt vulnerabilities by ensuring debt sustainability. Fiscal consolidation plans are less disruptive than an abrupt fiscal pullback brought on by loss of market confidence.
- Top priorities are to ensure everyone has access to affordable food and to protect low-income households from rising inflation. Attempts to limit price increases through price controls, subsidies or tax cuts will be costly to the budget and ultimately ineffective. Governments should allow prices to adjust and provide temporary targeted cash transfers to the most vulnerable. Domestic measures need to be complemented by global cooperation to foster resilience.