World Economy Needs Smart Fiscal Policies

Smart fiscal policy could support jobs, bring public debt to safer levels

Fiscal policy can help achieve needed structural reforms

Targeted fiscal steps can tackle youth unemployment, labor market problems

Job creation sits atop the policy agenda globally. High and persistent levels of unemployment call for a broad policy response, generally encompassing structural reform and other economic policies. While fiscal policy cannot substitute for comprehensive reforms, it can support job creation in a number of ways, according to the IMF’s latest Fiscal Monitor.

According to the International Labor Organization, global unemployment exceeds 200 million people, and an additional 13 million people are expected to be unemployed by 2018. In order to address the high and persistent levels of unemployment, the IMF is calling for a multipronged policy response, where fiscal policy works in tandem with broader structural reform efforts to support job creation.

“Under certain conditions, the fiscal decisions taken by countries can help promote labor market reforms,” said Vitor Gaspar, Director of the IMF’s Fiscal Affairs Department. “Labor market reforms can have sizeable costs. A higher deficit or slower pace of deficit reduction can absorb these costs and offset the adverse short-term impact of reforms on output and employment. It can also facilitate political consensus on reform, for instance, by compensating groups that may be adversely affected by the change. Smart fiscal policy also values public investment.”

Policymakers can use targeted measures—cuts in employers’ social contributions or reform of pension systems—as part of an arsenal of policies designed to help fix some of the current weaknesses in labor markets, such as high youth unemployment and low participation in the labor force by women and older workers. Measures targeted to specific labor market trouble spots are more cost effective than blanket ones.

The IMF Fiscal Monitor is published twice a year to track public finance developments around the world.

Advanced economies’ efforts on track

In advanced economies, a slowing pace of deficit reduction should provide support to economic activity. Fiscal efforts over the past five years in many of these countries have helped to stabilize debt-to-GDP ratios, though the average debt-to-GDP ratio across all advanced economies is expected to exceed 100 percent of GDP at the end of the decade. Hesitant recovery and risks of lowflation and...