Governments Must Press Ahead With Spending Reform

Fiscal risks abating but remain elevated

Emerging markets and low-income countries see rising fiscal vulnerabilities, although from still low levels

Difficult choices needed on spending reforms

In the latest edition of its Fiscal Monitor report, the IMF finds that recent policy moves have helped to broadly stabilize public debt ratios in most advanced economies, but debt in these countries remains at historic highs. The surge in public debt will take some time to unwind, and credible medium-term plans must be designed to both bring down debt ratios and at the same time enhance long-term growth prospects.

Across advanced economies, the pace of fiscal consolidation is set to slow in 2014 as focus shifts to how to best design fiscal policies supportive of both further consolidation and a still uneven recovery.

“In most countries, persistently high debt ratios continue to cast shadows over the medium term,” said Sanjeev Gupta, Acting Director of the IMF’s Fiscal Affairs Department. “Against this background, the top priority remains the design and implementation of credible medium-term consolidation plans to lower debt ratios to safer levels, while carefully balancing equity and efficiency goals.”

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

Debt stabilizes in advanced economies

In 2013, a faster-than-expected pace of fiscal consolidation in several advanced economies helped stabilize the public debt ratio and reduce the average overall fiscal deficit among these economies to 5 percent of GDP—almost half its peak in 2009.

Higher revenues, in part buoyed by growth, and lower spending helped both the United States and United Kingdom significantly narrow their 2013 budget deficits. In Japan, however, the deficit held steady at just under 8 percent of GDP, and the country is now stepping up its consolidation efforts. To dispel policy uncertainty and support a rebound in economic growth, formulating a longer-term, growth-friendly fiscal strategy remains a priority in Japan, as well as in the United States.

Although budget plans for 2015 have not yet been adopted, fiscal consolidation looks set to continue next year. As a result, debt-to-GDP ratios will start declining in about half of the highly indebted advanced economies by 2015—by end-2013 only a few had reached that point.

Vulnerabilities rising in emerging markets and low-income countries

In emerging market economies, deficits...