Governments Need to Tackle Fiscal Risks, Says IMF

Advanced economies need to reduce public debt

Emerging economies vulnerable to reversal of fortunes

Rising food and fuel prices strain some low-income country coffers

Fiscal balances are improving in most emerging economies, and some could do more as they experience a windfall from high commodity prices and strong capital flows.

Due to high debt and deficits, government financing needs continue to be large in advanced economies, and risks remain, according to the IMF’s latest analysis.

The IMF projects the pace at which advanced economies reduce their deficits and accumulated debt will be slower on average in 2011 than projected earlier, as the United States and Japan delay their plans.

The latest edition of the IMF’s Fiscal Monitor said many countries’ deficits will fall in 2011, reflecting fiscal tightening, particularly in Europe, and improved economic conditions. The average deficit for advanced economies is expected to fall by ¾ percent of GDP to 7 percent, which represents a slower pace than projected in the November 2010 report.

In 2011, emerging economies’ deficits are expected to fall 1¼ percent of GDP, but with big differences across regions. While emerging economies in Latin America and Europe are reducing deficits and debt levels, Asia with some exceptions, is not cutting back.

Japan’s devastating earthquake in March will require additional government spending for immediate humanitarian needs as well as reconstruction. Although it is too soon to estimate the fiscal costs, the country has ample funds to finance its rebuilding, the IMF said.

The United States will require significant deficit cuts in 2012 and 2013 to meet their commitments over the next few years. A downpayment in the form of deficit reduction this year would ease the burden in future years.

The IMF Fiscal Monitor is published twice a year to track public spending and government debt and deficits around the world.

Share the burden

The IMF said all countries that need to reduce their deficits must also take action to ensure that the burden of the fiscal adjustment, and the benefits of the economic recovery, are distributed fairly.

While most countries have plans in place to reduce their deficits and debt levels in the coming years, advanced and emerging market economies will need to

• Control health care and pension spending, which is projected to rise significantly in advanced economies in the coming years

• Strengthen the institutions charged with...