Governments Launch Plans to Reduce Debt and Boost Growth

Deficits are projected to fall for most countries in 2011

Policies to reduce deficits and debt accumulation take shape

Countries' different needs depend on financial markets, deficits, debt burdens

The IMF said the current pace strikes the right balance between reassuring financial markets concerned about mounting government debt, and avoiding an abrupt withdrawal of support for the fragile global recovery.

The pace of spending cutbacks is different for countries depending on both the strength of pre-crisis government finances and the amount of financial market pressures they face. Countries with higher deficits in 2009, or that are facing higher borrowing costs, are adjusting faster than others.

Many countries’ deficits have fallen in the past year, mostly as a result of improved economic conditions, including lower needs to support the financial sector, and collectively countries’ deficits are projected to decline to 6 and 5 percent of GDP in 2010 and 2011 respectively, from 6¾ percent in 2009, according to the IMF.

However public debt ratios are still rising, government financing needs continue to be high in advanced economies, and risks remain.

The IMF’s latest issue of the Fiscal Monitor, an analysis of public finance developments from around the world (photo: IMF)

The IMF Fiscal Monitor: Fiscal Exit – From Strategy to Implementation analyzes fiscal developments in advanced, emerging market, and low-income economies, explains why the pace of deficit reduction and debt accumulation varies across advanced economies, and examines financing requirements and policy options across economies.

During the IMF-World Bank Annual Meetings in Washington, D.C. in early October, IMF chief Dominique Strauss-Kahn said fiscal sustainability remains a problem for some countries, particularly those that entered the crisis with high levels of debt. He said in countries where the recovery remains fragile, and private sector demand is weak, government support may still be needed depending on individual country circumstances.

“Consolidate as much as you have to, and stimulate as much as you can,” said Strauss-Kahn.

Governments need to set debt goals

If countries do not bring down high post-crisis debt levels over the long run, they risk high interest rates, low private investment and growth, and fewer policy options to boost their economies in the face of another economic downturn, the IMF said.

A review of 25 advanced and emerging market...