by Don Alexander, MBA
Associate, RSD Solutions Inc.
According to a recent IMF report, governments are making progress in addressing fiscal policy issues, but downside risks remain elevated as 2011 growth prospects are reduced. The rising public debt levels in advanced countries are projected to top 100 percent of GDP in 2011. A large portion of the increase came since 2007 from a drop in GDP, lower revenues and elevated spending damaging government balance sheets.
Overall, fiscal adjustment in advanced countries has declined by over 2% of GDP since 2010. The improvement in most cases was at or better than expectations. Progress in fiscal adjustment is better than expected.
For Europe, the challenge is to sustain fiscal consolidation while minimizing the growth fallout. Europe needs to focus on crisis resolution mechanisms to help resolve the solvency issues and limit contagion. Overall, the deficits in the euro area are expected to decline by 2% of GDP this year and 1% next year. The speed and severity of the spread of financial pressures in the euro should serve as a lesson for the United States and Japan.
In the United States, a focus is needed on entitlement and tax reforms as well as measures needed to raise revenues and broaden the tax base. The U.S. deficit is projected to decline by 1% of GDP to 9.6% for 2011. For Japan, disaster relief and reconstruction are short-term objectives, but more detailed medium-term planning is needed to focus on reducing the debt and budget deficit ratio and raising tax revenues through reforms.
Emerging markets emerged from the crisis in relatively good shape, with continued progress expected on deficit reduction. A few countries could be vulnerable to shift in capital inflows. Low-income countries survived based on buffers built-up in good times, but need to address social spending and their vulnerability to rising food and commodity prices.
However, despite the IMF’s relative slightly optimistic view markets remain concerned about growth prospects. The IMF noted two risks in the outlook: that public sector insolvency and/or that excessive fiscal tightening are not sources of instability. The optimal policy is to reduce the deficit in a timely manner without severely impacting growth.
For more on this click on the link to the IMF site: www.imf.org/external/pubs/ft/fm/2011/02/fmindex.htm
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