Governments' Role in Economy at Heart of Debts, Deficits Debate

IMF hosts discussion on government debt and deficits

Daunting fiscal challenges include healthcare costs

Countries' priorities at heart of how to spend public money

Amid concerns over large and increasing debts and deficits in advanced economies, and their potential risks to global economic and financial stability, the IMF’s 2^nd Annual Fiscal Forum brought together policymakers from 35 countries, along with academics, to debate global fiscal issues a day after U.S. President Barack Obama announced $4 trillion in budget cuts.

Earlier in the week, the IMF released its latest global analysis of government debts and deficits, and said the outlook for 2011 is a mixed bag, with most advanced economies reining in fiscal deficits, but not fast enough to keep their debt from rising over the next few years.

The top four priorities outlined by the IMF are

• Decide on goals and put in place plans quickly to reduce debts over the next few years

• Make a downpayment on the deficit in the next few years

• Control spending on health care and pensions

• Strengthen the institutions charged with governments’ budgets, revenues, and spending.

One lesson from the crisis is the importance of countercyclical policy, which is designed to lean against the direction the economy is moving, such as increasing spending in times of recession or raising interest rates in times of inflation. As emerging markets experience strong economic growth, the fiscal situation can shift rapidly when growth slows.

“This is the real opportunity for emerging markets to be tough on fiscal policy, and to reduce deficits and increase their budget surpluses as much as possible,” said Kemal Derviş of the Brookings Institution, a Washington D.C.-based think tank.

Culture clash

The current political debate in the United States about when and how to cut deficits says a lot about a country’s culture and priorities when it comes to using taxpayers’ money, the forum heard.

“It’s not just a discussion about cutting debts and deficits, it’s a debate on the public good and what the state provides and what the private sector provides,” said Derviş.

The rising cost of healthcare remains a hot topic, along with the increasing size of the aging population in many advanced economies and a decreasing number of taxpayers. Earlier in the day, Larry Summers, a former U.S. Treasury Secretary, said healthcare “is the most difficult issue” in the United States “because of its complexity and...