by Don Alexander, MBA
Assocate, RSD Solutions Inc.
The IMF noted in its latest Fiscal Monitor (24th Jan.) that countries continue to make progress on deficit reduction.
Fiscal deficits in many advanced economies fell significantly during 2011, and most plan substantial adjustment this year. The pace of fiscal consolidation may slow as too rapid consolidation could exacerbate risks. Continued adjustment is necessary for medium-term debt sustainability, but should ideally occur at a pace that supports adequate growth in output and employment. Conversely, too rapid a consolidation in a slowing growth scenario could exacerbate risks.
Given the large adjustment already in train this year, governments should avoid responding to any unexpected downturn in growth by further tightening policies, and should instead allow the automatic stabilizers to operate, as long as financing is available and sustainability concerns permit. When economic conditions deteriorate they can cushion the impact on demand.
Countries with enough fiscal space (the room in a government's budget that allows it to provide resources for a desired purpose without damaging the sustainability of its financial position or the stability of the economy), including some in the euro area, should reconsider the pace of near-term adjustment. At the same time, some countries—notably, the United States and Japan—need to clarify their medium-term debt-reduction strategies. Adjustment should be supported by the availability of adequate nonmarket financing when, as in the euro area, market confidence is slow to respond to reforms.
Some emerging economies with low debt and deficits and declining inflationary pressure have room to make policy more supportive of economic activity. Others have little space for more than the operation of automatic stabilizers if growth slows. Emerging economies highly dependent on commodity revenues and external capital inflows also need to consider the risk of a large and protracted decline in these flows.
Corporations, like governments, should have contingency plans for meeting funding requirements as part of their risk management plans.
For more on this follow the link: www.imf.org/external/pubs/ft/fm/2012/update/01/pdf/0112.pdf
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