Debt levels at risk
THE path towards sustainable government debt levels around the world is under threat this year from the sheer number of elections taking place, the IMF said yesterday in a new report.
“Governments tend to spend more and/or tax less in election year,” Vitor Gaspar, the head of the IMF’s fiscal affairs said, ahead of the publication of the Fiscal Monitor report.
He added that the situation this year is particularly complicated because, “the political discourse is dominated by references to fiscal expansion and calls for fiscal support or public spending – or both.”
The Fiscal Monitor report found that global public debt “edged up again” last year, reversing a couple of years of decline, due largely to a fall in revenues “as windfall revenues from inflation waned.”
“Fiscal tightening is projected for 2024, but it is subject to considerable uncertainty,” the IMF report said.
Much of this uncertainty, the IMF said, was down to the fact that 2024 is the “Great Election Year,” when 88 economies or economic areas representing more than half of the world’s population have held, or are due to hold, elections. The IMF predicts that current spending and taxation levels have put global public debt on track to rise from just over 93% of economic output last year to 99% by 2029.
This trend is “driven by the world’s two largest economies, China and the US, where under current policies public debt is projected to continue increasing beyond historical highs,” the IMF report said.
While the IMF expects the US fiscal deficit to remain stuck above 6% over the next five years, the country’s strong economic position makes it a “very strong outlier in fiscal development around the world,” Gaspar said.
Like the US, China’s fiscal deficit is projected to remain at elevated levels over the next five years, rising from more than 7% of GDP last year to around 8% by 2029.
Given China’s role as a leading bilateral lender to many of the world’s developing economies, its fiscal position carries consequences for countries around the world. The report called for countries to consolidate their fiscal positions, by phasing out pandemic-era support measures, scaling back fuel and energy subsidies, and enacting entitlement reforms in advanced economies with ageing populations.