Advanced economies need long-term efforts to tame debt: IMF

Advanced economies must pursue long-term policy reforms to reduce public debt levels over the coming decades and ensure future fiscal sustainability, the International Monetary Fund has said.

In order to protect the fragile economic recovery, support growth and job creation and provide reassurance to capital markets, fiscal adjustment plans must be clearly defined—but with a focus on the medium term rather than seeking a quick fix, the IMF said in its three different studies released yesterday.

"Public debt levels among advanced economies have reached levels not seen before in the absence of a major war," said Carlo Cottarelli, Director of the IMF’s Fiscal Affairs Department and one of the authors of two of the reports.

General government debt in the G20 advanced economies surged from 78 per cent of gross domestic product (GDP) in 2007 to 97 per cent of GDP in 2009 and is projected to rise to 115 per cent of GDP in 2015, it said.

"High public debt is due not only to the financial crisis, but also to weak fiscal policy over the preceding decades, when debt levels ratcheted up during hard times but failed to fall in better years," he said.

Thus, the task ahead is all the more complicated because aging societies and global warming are putting additional pressure on public finances.

"This calls attention to the critical need for long-term fiscal reforms that will guarantee a gradual but sustained improvement in debt positions over the coming decades," Cottarelli said.

The IMF said the most indebted economies are approaching a "debt limit" beyond which their fiscal positions may become unsustainable.

"Debt limits are not etched in stone, but they show that a fundamental change in behavior relative to historical patterns will be needed to restore sustainability.

In other words, ‘business as usual’ won’t cut it," said Jonathan D Ostry, Deputy Director of the IMF’s Research Department and lead author of one of the papers.

"Countries will generally want to target debt levels well below their debt limits because governments may get little or no warning about imminent spikes in borrowing costs or curtailed access to markets as public debt rises or as views about fiscal risks or the reliability of fiscal data change,” Ostry said.