Countries Face Choices to Reduce Debt and Deficits

IMF hosts discussion about how best to reduce public debt and deficits

Benefits of government spending at crisis' peak debated

Countries' future plans to reduce debt need more detail

As governments in advanced economies face mounting debt and nervous financial markets, policymakers face difficult choices about how best to put fiscal policy on a sustainable path, while also promoting economic growth after the worst economic crisis in 80 years.

In a discussion hosted by the IMF in Washington, D.C. on December 9 that included representatives of civil society, academia, and the media, officials and experts on fiscal adjustments debated the pros and cons of ways to reduce deficits and debts, in light of past experience with large fiscal adjustments.

It’s all about growth

Putting plans in place to reduce government debt and deficits, and beginning to implement them, will shore up confidence in public finances today, and give a boost to economic growth over the long haul.

“High debt ultimately affects growth, and that’s why we need to tackle it,” said Carlo Cottarelli, head of the IMF’s Fiscal Affairs Department and host of the event.

With advanced economies facing record levels of public and private debts, the panelists agreed on one thing—there needs to be fiscal adjustment at some point over the next few years through higher taxes and lower government spending, according to Caroline Atkinson, director of the IMF’s External Relations Department and moderator of the debate.

“Fiscal adjustment is absolutely necessary to get the house in order and to maintain credibility,” said Carmen Reinhart, with the Washington-based Peterson Institute for International Economics think tank and a former IMF staff member. “There is no substitute for plain vanilla, old-fashioned fiscal discipline — whichever way you slice it, you’re going to need it.”

Reinhart added that the order of magnitude of debt today requires all the tools a country can muster.

According to the IMF, an important part of the solution to the debt problem will involve cutting spending on entitlements that were on an unsustainable path before the crisis hit. This is needed to create savings well into the future.

“You need to have a medium term plan, and most advanced economies need long-term reforms of pensions and health care,” said Cottarelli.

Unorthodox strategies de-mystified

Faced with the challenge of cutting spending and borrowing, some have suggested unorthodox tools...