The economic crisis caused by Covid prompted an aggressive monetary and fiscal policy response to avoid catastrophe. As the pandemic neared its end, the war in Ukraine, rising food and energy prices and more recently financial turmoil have complicated the recovery in a context of uncertainty and volatility and inflation that has skyrocketed over the past year . Now, the International Monetary Fund (IMF) believes that “monetary authorities’ efforts to bring inflation back to target levels need to be complemented by tighter fiscal policies,” the organization explains in its Fiscal Monitor report. presented this Wednesday in Washington.
The idea is that fiscal and monetary policy don’t row in opposite directions. If budget cuts get the upper hand, interest rates will need to be raised a little less. And “if inflation turns out to be more stubborn than expected, monetary tightening will have to be sustained for longer,” he adds. Of course, the fund asks that support be maintained for the most vulnerable and that the authorities be prepared should things go wrong, as has often happened lately.
The IMF offers some advice in case the path that goes wrong is a financial crisis that could put taxpayers’ money at risk: “To protect public resources, the decision-making process must be based on governance principles, backed by robust insolvency.” – and bankruptcy procedures supported.” It’s about intervening quickly while minimizing costs and mitigating the moral hazard that bailouts reward those who don’t deserve them and end up encouraging inappropriate practices.
But the panel also urges central banks and governments to be prepared should growth and unemployment pick up. In this case, a less restrictive policy would be required, allowing the automatic stabilizers to work (expenditure on unemployment rises and tax revenues fall in the event of an economic slowdown, increasing the deficit), particularly in cases where inflation control is available .
The IMF had already warned of the risk of a decoupling a few months ago. “While monetary policy is hitting the brakes, there should be no fiscal policy hitting the gas pedal. It would be a very bumpy and dangerous journey,” CEO Kristalina Georgieva said in October. Now he emphasizes that message: “It is important that fiscal and monetary policies remain closely aligned to achieve financial and price stability,” he says.
The new IMF report acknowledges that the global economy recovered quickly from the pandemic, overcoming obstacles but leaving scars. “Until now, the economic and social fabric has resisted disruptions in energy supply. But the multiple shocks have wiped out progress on poverty reduction and likely delayed achievement of the global goal of eradicating extreme poverty by 2030,” he stresses. Progress on other Sustainable Development Goals (SDGs), already slow before the pandemic, has also slowed.
At a press conference on Wednesday, the director of the IMF’s fiscal department, Vítor Gaspar, defended the tightening of fiscal policy in many countries with four arguments. First, “fiscal policy can and should support monetary policy to bring inflation back to target.” Second, it “contributes to financial stability” by moderating rate hikes. Third, “it helps contain public finance risks and creates fiscal space to respond to adverse macroeconomic or financial developments,” particularly in emerging markets. Finally, “stronger balance sheets also contribute to long-term debt sustainability in a challenging context that includes demographics, digitalization and the green transition.”
less national debt
The pandemic caused government debt to rise to almost 100% of global gross domestic product (GDP) in 2020, as the economy shrank and public deficits soared on lower revenues and higher spending. Now, “with strong nominal GDP growth in 2021-22, global debt experienced its sharpest decline in 70 years, standing at around 92% of GDP at the end of 2022, still around 8 percentage points above the level at the end of 2019” , explains the IMF.
Primary deficits excluding interest on debt are narrowing rapidly and are approaching pre-pandemic levels in many countries, but global deficits have narrowed somewhat less due to higher interest payments stemming from higher debt and higher interest rates. In 2023, global budget deficits are expected to widen slightly to an average of 5% of GDP, both on the back of higher interest rates and pressure to increase public spending, particularly spending on wages and pensions, to recover from inflation. The IMF expects public deficits to remain above pre-pandemic levels in the coming years.
In the case of Spain, the IMF has improved its forecasts for the evolution of public finances, according to data published this Tuesday in its World Economic Outlook, also included in the new report. The agency is forecasting a deficit of 4.5% of gross domestic product (GDP) this year, in line with its previous calculations, but lowering the 2024 forecast to 3.5% from 4.2% it had forecast in October. Good performance in tax collection, compounded by inflation, allows Spain to keep fiscal gap in check. In the longer term, however, the Fund’s projections suggest that the government deficit will increase again, reaching 3.8% of GDP in 2025 and 4% from this year. Still, it’s also a slight improvement on forecasts from six months ago.
The Spanish deficit, according to these estimates, will be slightly above the eurozone average (3.7% and 2.8% in 2023 and 2024 respectively), but below that of the G7 countries (5.6% and 5.3% in these years). or from the advanced economies of the G20 (5.3% and 5.1%). The most wasteful are Japan, the United States, the United Kingdom and France.
The IMF has also upgraded forecasts for government debt. In October, its forecast was 112.1% of GDP for 2023, 110.1% for 2024 and 109.0% for 2025. Now it expects 110.5%, 108.3% and 107.9% for the same years. Nominal GDP growth allows public debt to maintain a more pronounced downward path. Of course, the fund is once again concerned about further progress beyond 2025, putting its debt forecast at 109.3% of GDP in 2028. Japan, Greece, Italy, the United States and France are among the countries that outperform Spain on public debt.
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