Now Is the Time! Use Fiscal Policy to Support Sustainable Growth

  • Fiscal risks remain elevated
  • Lower oil prices present opportunity to reform energy subsidies and taxation
  • Stable macroeconomic environments are growth-friendly ones
  • In its latest Fiscal Monitor, the IMF recognizes influential factors that are assisting the recovery in many countries. Lower oil prices, growth-friendly monetary policy and slower rates of fiscal adjustment are all playing their part.

    However fiscal risks remain elevated, the report warns. Advanced economies face the triple threat of low growth, low inflation and high debt. Emerging and developing economies have experienced softening growth and higher costs linked to financial and exchange rate fluctuations. Exporters of oil and commodities have been hit with lower revenues.

    Smart taxation and spending and strong fiscal frameworks make a huge difference. “Fiscal policy continues to play an essential role in building confidence and supporting growth,” said Vitor Gaspar, Director of the IMF’s Fiscal Affairs Department.

    The IMF Fiscal Monitor is published twice a year to track public finance developments around the world. The latest edition outlines three areas for action:

    • Strengthening fiscal frameworks

    • Reforming energy subsidies

    • Using fiscal policy to stabilize output

    Advanced economies still slowed by debt

    Public debt continues to present a headwind to growth. Despite significant efforts since 2010, advanced economies’ average ratio of debt to GDP remains above 100 percent. This is expected to decline only slowly in coming years and some countries’ debt projections have been revised upward.

    Debt reduction efforts have been aided by stronger-than-expected growth in some countries, such as the United States. But they have been hampered by low levels of inflation levels in many advanced economies, notably in the euro zone.

    Growth and inflation have the potential to significantly ease the debt burden. If Austria, Italy, Japan and Portugal could attain 4 percent nominal growth by 2017, their debt ratio could drop by as much as 10 percentage points by 2020.

    Emerging markets and low-income countries

    Average deficit for emerging, middle income and low-income countries is on the rise and expected to increase in 2015. Oil exporters have lost significant revenues due to the sharp drop in prices. While some have responded with fiscal tightening, others are accommodating the...

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