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Governments around the world must take more meaningful steps to rein in public spending and raise revenues or risk hindering central banks’ efforts to tame inflation, an IMF official has warned.
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”.
Speaking to the Financial Times ahead of the fund’s annual meetings in Marrakech in 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 “stabilising effect” on global bond markets and help shore up financial stability, he said.
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. This would be a “persistent trend” over the medium-term and have a “lasting effect”, he warned.
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 per cent of gross domestic product by the end of the current decade.
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 per cent of the country’s GDP this year. It would remain high in 2024, at 7.4 per cent. Net borrowing would still be at 7 per cent of GDP in five years’ time, 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 per cent 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 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.”