The International Monetary Fund (IMF) has called on governments around the world to take more meaningful steps to rein in public spending and raise revenues or risk hindering central banks’ efforts to tame inflation.
Vitor Gaspar, head of the fiscal affairs department at the multilateral lender, urged policymakers to tighten fiscal policy at a time when it was becoming increasingly difficult for most countries around the world to balance public finances.
According to reports gathered from the Financial Times ahead of the fund’s annual meetings in Marrakech Morocco, he said:
- “Timing matters, and the sooner [this] can be done in many countries the better, from the viewpoint of consistency between monetary and fiscal policy.”
Fiscal discipline would help the credibility of central banks and lessen the need to hike interest rates, which would have a stabilizing effect on global bond markets and help shore up financial stability, he said.
The surge in global borrowing
Gaspar’s comments come amid a surge in global borrowing costs as central banks have sought to bring inflation under control. Financial markets saw some reprieve this week, but Gaspar warned that debt servicing costs for governments were on the rise.
He warned that this would be a persistent trend over the medium term and have a lasting effect.
His call came ahead of the IMF’s latest report on the top fiscal challenges confronting governments. The Fiscal Monitor, published on Wednesday, warned of rising deficits, reflecting slower growth and higher real interest rates, with governments dipping further into the red.
On current trends, government debts would grow considerably faster than pre-pandemic projections, with the global public debt ratio on course to approach 100% of gross domestic product by the end of the current decade.
The US is one of the worst performers among large economies
The US stood out as one of the worst performers among large economies, according to the report. Its general government deficit is on track to exceed 8% of the country’s GDP this year.
It would remain high in 2024, at 7.4%. Net borrowing would still be at 7% of GDP in five years, the IMF warned.
A White House official attributed the jump in the deficit between 2022 and 2023 to a sharp decline in revenues, saying this accounted for 63% of the increase as a share of GDP.
Government spending has been a major political sticking point in Washington, almost leading to a government shutdown before Democrats and Republicans agreed on a short-term deal last month. A new budgetary deadline is now coming in mid-November.
“Something must give to balance the fiscal equation,” the IMF warned in the Fiscal Monitor. “Policy ambitions may be scaled down or political red lines on taxation moved if financial stability is to prevail.”
