March 2018 | FINANCE & DEVELOPMENT 5
The global economy has a spring in its
step. Growth is picking up, and the
IMF has been ratcheti ng up its forecasts.
Government coﬀers are ﬁlling a nd, with
more people at work, demand for public social
support is receding. e ﬁscal woes of the past
decade seem behind us.
But this sunny perspective ignores debt levels
that remain close to historic highs and the inev-
itable end of the cyclical upsw ing. Estimates of
underlying growth potentia l have hardly budged,
and interest rates—t he cost of servicing al l this
debt—are start ing to rise, mak ing it harder to
reﬁnance bonds and loans.
How the government taxes, spends, and ma nages
debt is therefore as hot a political topic as ever. Just
look at recent debates in the US Congress and t he
German coalition ta lks. While ﬁsca l choices are a
matter of politics, recent research a nd experience
can teach us much about the best path forward.
Start with the question of how much debt is too
much. Academics and policymakers agree that a
general limit—such as the 60 percent of GDP in
the EU Maastricht Treaty—no longer makes sense;
it doesn’t capture enduringly low interest rates and
nominal growth or countries’ complex circumstances
or credibility with ﬁnancial markets. Japan clearly
can carry more debt load than, say, Egypt. But few
deny the urgency of debt that is high and rising.
Low-income economies may be at greatest risk.
Traditionally, they borrowed from oﬃcial cre ditors
at below-market rates. But in recent years, many
took advantage of rock-bottom interest rates to load
up on commercial debt, leaving them vu lnerable
to ﬁnancial market swings. Higher global rates
could divert precious budget resource s to debt
servicing from crucia l infrastructure projects and
social services. So it is all the more importa nt for
these countries to streng then their tax capacity.
e recent postcrisis experience al so holds les-
sons on when to tackle debt—and when not to.
Spending cuts and tax h ikes during a recession may
only amplify the decl ine. It is much less painful to
revamp the tax a nd beneﬁt system when the econ-
omy is on an upswing and as pa rt of a multiyear
adjustment. Research shows that t he stimulatory
eﬀect of ﬁscal e xpansion is weak when the economy
is close to capacity. So increasing budget deﬁcits
now would be counterproductive in most countries.
Conversely, raising budget balances towa rd their
medium-term targets ca n be achieved at little cost
to economic activity.
How best to reduce deﬁcits? To raise revenue,
simplify the tax code, broaden the tax base, and
improve collection capacity. On the spending side,
cutting unproductive current expenses (for instance,
on an ineﬃcient civil service) and subsidies (for
instance, on energy consumption) is the way to go.
Growth-enhancing infrastructure investments and
crucial social services such as health and education
should be maintained. Well-designed ﬁscal policy
can address inequality and stimulate growth.
e time to ﬁx the ﬁsca l roof is now, while the
sun is shining. Policyma kers should heed the les-
sons learned and tack le debt on the upswing.
CHRISTOPH B. ROSENBERG is an assistant director of the
IMF’s Communications Department.
Good economic times oﬀer an opportunity to tackle budget deﬁcits
Christoph B. Rosenberg