Moving Public Debt onto a Sustainable Path

Debt problems began before crisis, will take years to fix

Detailed long-term plans to reduce debt would help protect fragile recovery

Credible action by countries essential to manage risks

The IMF said governments need to develop credible fiscal plans that focus on longer-term solutions, rather than on quick fixes, to protect the fragile recovery and reassure financial markets. In some cases, a marked departure from the normal historical pattern of adjustment to rising public debt is needed to manage fiscal risks.

The research is part of the IMF’s ongoing analysis to help countries emerge out of the crisis and return to economic growth and more sustainable debt levels.

Long-Term Trends in Public Finances in the G-7 Economies, Fiscal Space, and Default in Today’s Advanced Economies: Unnecessary, Undesirable and Unlikely provide a comprehensive analysis of the fiscal challenges faced by different countries in the coming years.

Debt surges

“Public debt levels among advanced economies have reached levels not seen before in the absence of a major war,” said Carlo Cottarelli, Director of the IMF’s Fiscal Affairs Department and one of the authors of two of the reports.

“The most indebted economies are approaching debt limits beyond which their fiscal positions may become unsustainable,” said Jonathan D. Ostry, Deputy Director of the IMF’s Research Department, and author of one of the reports.

General government debt in the G-20 advanced economies surged from 78 percent of GDP in 2007 to 97 percent of GDP in 2009 and is projected to rise to 115 percent of GDP in 2015.

The fiscal stimulus packages put in place to combat the worst effects of the crisis account for only one-tenth of the increase in public debt projected during 2008-15.

While debt is high, the IMF said default on sovereign debt would make little sense for advanced economies because the central problem in these countries is high primary deficits, not high debt service.

At the same time, the IMF cautioned that governments need to avoid complacency when their debt is close to its maximum sustainable level because there may be little warning from markets ahead of a very sharp spike in borrowing costs.

Legacy of issues

According to the global lender, the mismanagement of fiscal policy prior to the crisis lead to insufficient reduction of government deficits—particularly during periods of strong growth—and to debt accumulation, and left a legacy of debt issues for policymakers...