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ON THE LEFT: Top priority is lower debt ratios


International Monetary Fund

ON THE LEFT: Top priority is lower debt ratios

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Fiscal risks are abating somewhat but remain elevated. In advanced economies, recent policy moves have broadly stabilised public debt ratios, but medium term prospects are still uncertain, and debt remains at historic highs. Fiscal vulnerabilities are rising in both emerging market economies and low-income countries, although in most cases from relatively moderate levels.
Across country groups, fiscal policy should aim at rebuilding policy space while supporting the recovery and long-term growth prospects. In most advanced economies, the pace of fiscal consolidation will slow in 2014 as average gross debt stabilises and the focus shifts appropriately toward ensuring that the composition of adjustment supports the still uneven recovery.
The main exception is Japan, where fiscal consolidation measures are projected to start this year.
In most countries, persistently high debt ratios continue to cast shadows over the medium term, and risks to fiscal forecasts remain mostly on the downside, reflecting weak growth prospects, medium-term policy uncertainty, and persistent deflationary concerns with potentially deleterious impacts on debt dynamics and budget outturns. Against this background, the top priority remains the design and implementation of credible medium-term consolidation plans to lower debt ratios to safer levels, while carefully balancing equity and efficiency goals.
Among emerging market economies, deficits remain significantly above pre-crisis levels as most countries opted to postpone fiscal adjustment in 2014. In countries more closely integrated with international capital markets, the normalisation of global liquidity conditions has begun to raise borrowing costs and financial volatility, giving yet greater urgency to fiscal consolidation, particularly where deficits and public debt have remained stubbornly high.
More broadly, well-designed fiscal reform can help strengthen safety nets, boost potential growth, and prop up domestic saving where it has eroded.
Fiscal space is shrinking in many low-income countries as revenue mobilisation has lagged behind fast spending growth. Reduced availability of aid resources and commodity price volatility remain key risks for these economies, calling for renewed efforts to step up the mobilisation of domestic revenue, as well as for reforms to increase spending efficiency, including through the streamlining of subsidies.        
Although growth has been resilient so far, fiscal positions may deteriorate as the result of spillovers from a potential emerging market economy slowdown or from weak growth in advanced economies.
Ensuring the sustainability of public finances requires difficult choices on both sides of the budget. While tax reform can help boost potential growth through the removal of distortions, spending reforms have a key role to play in strengthening public service delivery.
This will be no easy task, however: even though country preferences about the size and functions of government do vary, as countries become richer, both the demand for public goods and services and the cost of providing them increase relative to other goods and services produced in the economy. Coupled with the projected increase in age-related expenditures resulting from an aging population, pressures on government spending in the future can only go up.
Meaningful expenditure reform strategies boil down to three main elements: ensuring the sustainability of social spending and the public wage bill – the main items in most governments’ budgets; achieving efficiency gains while paying due regard to equity; and establishing institutions that promote spending control. Within these parameters, countries have substantial space to choose the desired level of provision of public services and spending priorities.
Fiscal risks are abating somewhat but remain elevated. In advanced economies, recent policy moves have broadly stabilised public debt ratios, but medium term prospects are still uncertain, and debt remains at historic highs. Fiscal vulnerabilities are rising in both emerging market economies and low-income countries, although in most cases from relatively moderate levels.
Across country groups, fiscal policy should aim at rebuilding policy space while supporting the recovery and long-term growth prospects. In most advanced economies, the pace of fiscal consolidation will slow in 2014 as average gross debt stabilises and the focus shifts appropriately toward ensuring that the composition of adjustment supports the still uneven recovery.
The main exception is Japan, where fiscal consolidation measures are projected to start this year.
In most countries, persistently high debt ratios continue to cast shadows over the medium term, and risks to fiscal forecasts remain mostly on the downside, reflecting weak growth prospects, medium-term policy uncertainty, and persistent deflationary concerns with potentially deleterious impacts on debt dynamics and budget outturns. Against this background, the top priority remains the design and implementation of credible medium-term consolidation plans to lower debt ratios to safer levels, while carefully balancing equity and efficiency goals.
Among emerging market economies, deficits remain significantly above pre-crisis levels as most countries opted to postpone fiscal adjustment in 2014. In countries more closely integrated with international capital markets, the normalisation of global liquidity conditions has begun to raise borrowing costs and financial volatility, giving yet greater urgency to fiscal consolidation, particularly where deficits and public debt have remained stubbornly high.
More broadly, well-designed fiscal reform can help strengthen safety nets, boost potential growth, and prop up domestic saving where it has eroded.
Fiscal space is shrinking in many low-income countries as revenue mobilisation has lagged behind fast spending growth. Reduced availability of aid resources and commodity price volatility remain key risks for these economies, calling for renewed efforts to step up the mobilisation of domestic revenue, as well as for reforms to increase spending efficiency, including through the streamlining of subsidies.        
Although growth has been resilient so far, fiscal positions may deteriorate as the result of spillovers from a potential emerging market economy slowdown or from weak growth in advanced economies.
Ensuring the sustainability of public finances requires difficult choices on both sides of the budget. While tax reform can help boost potential growth through the removal of distortions, spending reforms have a key role to play in strengthening public service delivery.
This will be no easy task, however: even though country preferences about the size and functions of government do vary, as countries become richer, both the demand for public goods and services and the cost of providing them increase relative to other goods and services produced in the economy. Coupled with the projected increase in age-related expenditures resulting from an aging population, pressures on government spending in the future can only go up.
Meaningful expenditure reform strategies boil down to three main elements: ensuring the sustainability of social spending and the public wage bill – the main items in most governments’ budgets; achieving efficiency gains while paying due regard to equity; and establishing institutions that promote spending control. Within these parameters, countries have substantial space to choose the desired level of provision of public services and spending priorities.

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