Government Deficits Mostly Fell in 2010, Pace Will Slow in 2011

Advanced economy debt rising, cutting public debt vital in the next few years

Europe's plans to reduce deficits on track, other key countries falling short in 2011

Emerging economies should save their windfall for a rainy day

Many countries’ deficits have fallen in the past year, reflecting both higher revenues due to improved economic growth and lower spending. Advanced economies’ average deficits declined to 8 percent of GDP in 2010, a slight improvement over earlier projections, according to new data in the IMF Fiscal Monitor Update released on January 27 in Washington, D.C.

But the IMF projects the pace at which advanced economies reduce their deficits and accumulated debt will be slower on average in 2011 as some countries delay their plans.

Earlier in the week, the IMF said the global economy will grow by 4½ percent in 2011, but action is still needed to address key problems, including high unemployment and banking issues in advanced economies and risks of overheating in emerging markets, according to the latest World Economic Outlook and Global Financial Stability Report, released on January 25 in Johannesburg, South Africa.

Government bond yields in all major advanced economies have increased since November in the wake of stronger growth prospects. Financial market pressures have remained limited to a few European countries. Overall government debt remains very high for advanced economies, topping 96 percent of GDP in 2010, the IMF said.

“Fiscal risks remain elevated and in some respects have increased since our November Fiscal Monitor,” said Carlo Cottarelli, Director of the IMF’s Fiscal Affairs Department, which produced the report. “This underscores the importance of making more specific and concrete the fiscal adjustment plans that countries have to implement over the medium term.”

Different countries, different speeds

The pace of fiscal adjustment varied across advanced and emerging economies, and depended on differences in countries’ debt levels, economic growth and...