Fiscal Risks Retreat as Deficits Continue
to Fall: IMF Fiscal Monitor
World deficit declined to 4.3% of
GDP in 2012 and is expected to decline further to 3.5% this year. Meanwhile
projected figures for India
for 2013 leaves the deficit unchanged from its 2012 level in both headline and
cyclically adjusted terms at 8.3% and 8.8% of GDP respectively.
A gradually improving
global economy and progress toward reducing deficits in advanced economies have
lowered short-term fiscal risks, yet many countries still face a long road back
to fiscal health.
In its
Fiscal Monitor, the International Monetary Fund (IMF) sees an improved picture
across most of the world in terms of countries getting a handle on their
deficits. Many countries have also taken important first steps to bring overall
debt down to levels needed to ensure strong and vibrant economies.
Deficits in advanced
economies fell by 0.75% of GDP in 2012. They dropped both in headline and in
cyclically-adjusted terms, and are projected to fall at a faster pace in 2013.
The report attributes much of the improved picture to concerted efforts by
governments to bring spending under control following the peak of the crisis in
2009, as well as a gradually improving external environment. The IMF forecasts
continued improvement in global economy with economic growth worldwide expected
to reach 3.3% in 2013.
Long-term outlook
Bringing public debt
back to prudent levels poses a long-term challenge, according to the IMF
report, but it is a challenge that can be successfully met. Debt ratios are
declining or stabilizing in about two thirds of advanced economies, but further
adjustment efforts will be needed in the remaining third—representing 40%
of global GDP. In some countries, particularly several European countries under
market pressure, debt ratios will not peak until after 2014, as seen in the
projections for France, Italy, and Spain.
In both the United States and Japan, the continued absence of a
clear and credible medium- and long-term consolidation plan remains a concern.
Stimulus spending and increasing social security outlays in Japan are expected to keep the
deficit there at a level more than twice the advanced economy average. In the US, an
agreement on entitlement reforms and other much-needed measures to control the
debt has yet to be reached.
Institutional reforms,
such as fiscal rules, independent monitoring agencies, and medium-term spending
frameworks, can buoy the credibility of fiscal adjustment packages and their
political acceptance. Countries such as Ireland
and Portugal have begun
making institutional reforms by introducing limits on government spending, and
ongoing reforms across Europe are calling on
fiscal councils to play a strong and independent role in fostering fiscal
discipline.
The overall debt
situation in most emerging market economies and low-income countries remains
more favorable than in advanced economies, owing in part to relatively low
levels of debt and deficits combined with low interest rates and growing
economies. Under these conditions, many emerging market economies have had the
scope to pause their fiscal adjustment. Yet, as the IMF report notes,
medium-term pressures like infrastructure and age-related spending mean that
these countries need to adopt a cautious approach to budget decisions going
forward.
In Brazil, the authorities are
targeting a primary surplus of 3.25% of GDP, which would imply a tightening of
about 1.25% of GDP in cyclically adjusted terms. However, the primary surplus
target could be reduced by up to 0.9% of GDP to support investment.
In the Russian Federation,
the 2013 overall deficit is expected to increase by 0.5% of GDP relative to
previous projections, as a result of the decline in oil prices.
In India, subsidy reduction measures, other
spending cuts, and tax administrative measures recommended by the
government-appointed Kelkar Commission will contribute to a reduction in the
projected 2013 deficit of about 0.75% of GDP relative to previous forecasts,
which would leave the deficit almost unchanged from its 2012 level in headline
and cyclically adjusted terms.
In China,
the cyclically adjusted primary surplus declined by 0.75% of GDP in 2012 and is
expected to remain unchanged in 2013. Recorded gross debt and deficits remain
low, though they exclude the actual and contingent liabilities arising from
local government operations.
In South Africa,
where the deficit still hovers at about 5% of GDP, the medium-term budget
policy statement has reaffirmed the commitment to fiscal consolidation. The
authorities are aiming to deliver about half of the future adjustment through
containment of the wage bill, but additional measures are not yet defined.
In the Middle East and North
Africa, amidst political instability and volatile
oil prices, fiscal vulnerabilities are on the rise. Pressures from public
sector wages and on subsidies have caused a deterioration of the fiscal
balances of most oil importers and non– Gulf Cooperation Council oil
exporters. Many oil importers have exhausted their fiscal buffers.
Fiscal consolidation is
also on hold in most low-income countries, and deficits in most countries are
still larger than pre-crisis levels. Strong spending growth, due in many cases
to large increases in public investment, is leading to higher debt-to-GDP
ratios in countries like Ghana
and Senegal.
Fiscal Balances
(in percentage)
Source: IMF
Warm regards,
Dr. S P Sharma
Chief Economist
