The IMF announced today (Wednesday, April 12, 2023) in a press briefing that fiscal policy is returning to normal three years since the outbreak of the COVID-19 pandemic.
After providing extraordinary support simultaneously in 2020, both monetary and fiscal policy tightened in nearly three-quarters of countries in 2022 amid high inflation and the expiration of pandemic-related spending measures.
“The period that started with the pandemic in 2020 has seen unprecedented swings in debt and deficits. After an initial surge to levels of almost 100% of GDP in the subsequent years 2021 and 2022, we have seen a sharp fall in the public debt to GDP ratio, a fall that is a record in the last 70 years. But already in 2023, we see public debt rising again. Public debt is now higher, and it grows faster than before the pandemic,” said Vitor Gaspar, Director of the Fiscal Affairs Department at the IMF.
These sizable reductions in debts and deficits stem in large part from atypical growth and inflation dynamics. In 2022, most countries experienced revenue surprises amounting to 3.1 percent of GDP on average for advanced economies and 2.5 percent for emerging market and developing economies, with particularly large revenue windfalls in oil exporters.
“Policy advice has to be adapted to country specific circumstances. There are many relevant differences. Let's look at global public debt trends, two thirds of countries are expected to see reductions in their public debt ratios, but global debt is expected to go up. Why? That is due to the behavior of some large advanced and emerging market economies. Economies like Brazil, China, Japan, Turkey, South Africa, United States, and the United Kingdom,” added Gaspar.
Under current projections, the envisaged gradual and moderate fiscal tightening will not be sufficient to prevent public debt ratios from resuming an upward trend, as nominal GDP slows, driven by advanced economies and some large emerging market economies.
“When it comes to policy recommendations, the Fiscal Monitor makes a strong case for fiscal tightening. The main reason is that by tightening fiscal policy, there is support for monetary policy and the required increase in monetary policy rates is less. That also contributes to financial stability, helps reduce public finance risks and to build buffers which are important to allow authorities to respond to adverse economic or financial shocks,” explained Gaspar.
Beyond the near-term imperative to safeguard poorer households, long-standing challenges—including the climate agenda and population aging—have likewise become more pressing.
“The most important global policy challenge right now is to avoid catastrophic climate change by accelerating green transformation. Any delays will only magnify costs. We urgently need individual action at country level, but also global collective action to limit temperature increases to tolerable levels,” said Gaspar.
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