Amid Improving Fiscal Outlook, IMF Advises Caution

Many countries remain vulnerable to demand slowdown

Confidence boosted as countries set up fiscal rules

Sizeable fiscal adjustment still needed over medium term

The latest edition of the IMF’s Fiscal Monitor says that continued efforts to put public finances on a sounder footing over the medium term are key to sustainable economic growth.

Yet in countries with some room to maneuver fiscally, the pace of planned cuts may need to be adjusted to avoid undue pressure on economic growth and employment.

In 2012, overall deficits in the advanced economies are projected to decline on average by close to 1 percentage point of GDP, and slightly faster in 2013. In the United States, the overall deficit in 2012 is expected to decline by 1.5 percent of GDP, with an additional reduction of 1.8 percent of GDP in the pipeline for 2013. Japan’s deficit will decline by only 0.1 percent of GDP in 2012 as it continues to meet the costs associated with earthquake and tsunami reconstruction.

“It is critical that the adjustment proceeds at the right speed—not too fast, not too slow, and with a medium-term plan,” said Carlo Cottarelli, head of the IMF’s Fiscal Affairs Department.

Cautious approach

The IMF says continued adjustment in advanced economy deficits is necessary if countries hope to regain the freedom to respond to future downturns. However, countries with strong fiscal positions and market credibility could consider slowing the pace of adjustment this year to reduce downside risks, while maintaining their medium-term adjustment commitments. The IMF cautions that if economic growth turns out to be slower than expected in the coming year, countries with adequate financing should allow their deficits to rise rather than tightening further.

In contrast, in emerging economies, the IMF sees fiscal adjustment slowing considerably this year. For many of these countries, the slowing is appropriate given somewhat weakening growth and their relatively favorable fiscal positions vis-à-vis the advanced economies.

For low-income countries, progress on improving the fiscal situation slowed in 2011, partly under the weight of increased subsidies in response to the food and fuel price rises earlier in the year. In 2012, deficits are projected to widen in most countries, even though growth is projected to hold up fairly well.

The IMF Fiscal Monitor is published twice a year to track public spending and government debt and deficits around the world.

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