By Nick Mann | 17 April 2013
The world’s advanced economies reduced their deficits again last year as the steady fiscal consolidation carried out since the peak of the financial crisis continued to pay dividends, the International Monetary Fund said yesterday.
According to its latest Fiscal monitor, the combined deficit of the 35 economies, which include the US, Europe, Canada and Japan, fell by 0.75% of their gross domestic product in 2012 to 5.9%. Their combined deficits this year are expected to fall again this year to 4.7% % of GDP – almost half the 9% they were at the peak of the financial crisis in 2009.
Carlo Cotterelli, director of the IMF fiscal affairs department, said: ‘Half of the fiscal adjustment road has been covered. Indeed, one could say more than half, because not all countries need to reach a balanced budget.’
This improvement is an ‘important first step’ to improving countries’ debt levels, the IMF said. The advanced economies’ debt-to-GDP ratio increased since 2007 to a peak of 110.2% of GDP last year, but the IMF now expects it to fall slightly, to 109.3%, before a slight increase to 109.5% in 2014.
‘Several’ advanced economies are now within 1% of GDP of recording a budget surplus which, if maintained, would enable them to reduce their debt to the level the IMF believes is appropriate for them, 60% of GDP, by 2030.
However, it also noted that in ten advanced economies – the US, Japan, UK and seven eurozone countries – debt-to-GDP ratios were still above 90% and rising.
Cotterelli commented: ‘The good news is that it is only ten economies. The bad news is that they are pretty large economies and they account for 40% of world GDP. So what happens to fiscal policy in these countries matters quite a lot for the rest of the world.’
The report added: ‘Most of these countries have never experienced debt levels similar to the current ones, and certainly not for decades. They will need to undertake unprecedented fiscal efforts to bring their debt ratios to traditional norms, even if this is to occur only over a relatively long horizon.’
According to Cotterelli, the pace of fiscal adjustment planned for this year is ‘broadly appropriate’, but the IMF has concerns over the deficit reduction being carried out in the US and Japan. In the former, fiscal tightening is ‘unnecessarily rapid’, he said, while Japan’s deficit remains ‘stuck’ at 9% of GDP and the country has yet to start the process of fiscal adjustment.
In its World economic outlook, also published yesterday, the IMF downgraded its forecast for world economic growth this year from the 3.5% projected in January to 3.3%. Its forecast for growth next year remained unchanged at 4%.
‘In advanced economies, activity is expected to gradually accelerate, starting in the second half of 2013,’ it said. ‘Private demand appears increasingly robust in the United States but still very sluggish in the euro area. In emerging market and developing economies, activity has already picked up steam.’
