Fiscal Risks Retreat as Deficits Continue to Fall

Fiscal adjustment is proceeding in most advanced countries

Strengthening fiscal institutions seen as helpful to fiscal consolidation efforts

Persistently high levels of debt still pose risk to future economic prosperity

In the latest edition of its Fiscal Monitor, the IMF sees an improved picture across most of the world in terms of countries getting a handle on their deficits. Many countries have also taken important first steps to bring overall debt down to levels needed to ensure strong and vibrant economies.

Deficits in advanced economies fell by ¾ percent of GDP last year. They dropped both in headline and in cyclically-adjusted terms, and are projected to fall at a faster pace in 2013. The report attributes much of the improved picture to concerted efforts by governments to bring spending under control following the peak of the crisis in 2009, as well as a gradually improving external environment. The global economic outlook continues to improve with economic growth worldwide expected to reach 3.3 percent in 2013.

Looking at the cyclically-adjusted budget deficit—that is, net of the effects of short-term fluctuations in output and income, gives a more informative snapshot of the government’s finances because it sets aside temporary ups and downs in the economy.

For instance, in times of recession, government tax revenues are generally lower and spending can be higher because of the need to make payments under unemployment insurance schemes.

By looking at the cyclically-adjusted budget deficit, economists get a better idea of what a government’s deficit is in the midst of normal economic conditions.

The IMF Fiscal Monitor is published in April and October each year to track public spending and government debt and deficits around the world.

Long-term outlook

Bringing public debt back to prudent levels poses a long-term challenge, according to the IMF report, but it is a challenge that can be succesfully met. Debt ratios are declining or stabilizing in about two thirds of advanced economies, but further adjustment efforts will be needed in the remaining third—representing 40 percent of global GDP. In some countries, particularly several European countries under market pressure, debt ratios will not peak until after 2014, as seen in the projections for France, Italy, and Spain.

In both the United States and Japan, the continued absence of a clear and credible medium- and long-term consolidation plan remains a concern. Stimulus...