Governments should keep trimming the budget deficits they ran up in the pandemic, even as they seek to help households hit by soaring energy and food prices, the International Monetary Fund said.
Global public debt is set to reach 91% of gross domestic product this year, some 7.5 percentage points above its pre-Covid level, the IMF said in the latest edition of its Fiscal Monitor, published on Wednesday.
While debt ratios have retreated from their 2020 peak, with economies recovering and governments paring back emergency measures, the cost of servicing it is set to rise as central banks drive up interest rates to fight inflation. And this year’s spike in commodity prices has brought new pressures to spend.
Fiscal Balances | General government net lending/borrowing as share of GDP
European countries have sought to cap natural-gas and electricity costs after Russia’s invasion of Ukraine left the continent short of fuel. The UK triggered a bond-market meltdown when it tried to combine energy aid with tax cuts, forcing the government into a U-turn. Lower-income countries are struggling to pay their import bills in what the IMF has called the worst food crisis in more than a decade.
As they seek to address those challenges, politicians in charge of national budgets should avoid across-the-board subsidies and make sure support is targeted to those who need it most, the IMF said. Otherwise they risk fanning the inflation that their central banks are trying to rein in.
“Prioritizing policies and programs is increasingly vital as governments operate within tighter budgets,” the fund said. “Fiscal policy should protect the most vulnerable while pursuing a tightening stance to avoid overburdening monetary policy in the fight against inflation.”
For developing economies that have limited spending capacity to protect their citizens from the food-price shock, “greater global efforts” should be made to provide emergency financing and humanitarian aid, the IMF said. More than half of low-income countries are already in debt distress, or at high risk of it.
Generous, In Hindsight
The new edition of the Fiscal Monitor also surveys some of the measures that governments took in the pandemic, seeking lessons that can be applied in future downturns. Policies like cash transfers deployed in the US and Brazil, and the job-retention plans that were widespread in European Union countries, succeeded in shoring up consumption while also reducing inequality, it found.
Still, “in hindsight, some government interventions appear generous,” the IMF said.
It argued that by bolstering existing social safety nets and preparing crisis measures in advance -- like extra benefits that kick in automatically when employment slumps, for example -- governments can deliver aid more efficiently and avoid the over-spending that comes when policies have to be designed on the fly in the heat of emergency.