Global public debt, fiscal deficits to reach all-time high, IMF warns

A top IMF official on Friday warned that the global public debt is expected to exceed 100 per cent of the GDP in 2020-21, and the average overall fiscal deficit is expected to soar to 14 per cent of the GDP in 2020, pointing out that never have public debt and deficits risen so high and so fast.

The steep contraction in output and ensuing fall in revenues along with a sizable discretionary support have led to a surge in the government debt and deficits, Vitor Gaspar, Director of the International Monetary Fund (IMF’s) Fiscal Affairs Department told PTI.

“Global public debt is expected to reach an all-time high, exceeding 100 per cent of the GDP in 2020–21, a surge of almost 20 percentage points from a year ago,” he said, adding that the rise in debt is most significant among advanced economies such as the US, Japan and those in Europe.

“Meanwhile, the average overall fiscal deficit is expected to soar to 14 per cent of the GDP in 2020, 10 percentage points higher than last year. Never have public debt and deficits risen so high and so fast,” he said.

These record-high levels of global public debt are, however, accompanied by a record low nominal interest rates, both in the advanced and in emerging market economies, Gasper noted.

And they are expected to stay low in the absence of inflationary pressures. In many cases, this opens a considerable room to maneuver, at a time when fiscal support is needed. In many advanced economies, high debt levels have been accompanied by the declining debt servicing costs, he said.

Still, caution is necessary, Gasper said, observing that many advanced economies face long-term fiscal pressures, especially due to the population ageing, which may weigh on long-term debt sustainability.

Some, emerging market economies may face a costly debt rollover if financial conditions tighten again, like they did in March, the IMF official warned.

And the most vulnerable low-income developing economies, many of which were already facing a high risk of debt distress prior to the crisis, will need sustained support from the international community to ensure that they can respond to the pandemic and contain the rise of poverty and inequality, he said.

The provision of debt relief under the G20 Debt Service Suspension Initiative is a good example of a successful global coordination, he said.

Responding to a question, Gasper said that in China, the recovery is now well on its way, as national containment measures were withdrawn, and policy support has gained strength.

In response to the initial outbreak, the authorities provided timely and targeted fiscal support to the health sector and the most-affected firms and households, which mitigated the impact of the outbreak on jobs, contributed to avoiding unnecessary bankruptcies, and helped provide protection for the vulnerable, he said.

The overall fiscal support is expected to be about 5.8 percentage points of the GDP.

“Of course, should the recovery fall short, China will have to do more, and it has the fiscal space to do so,” he said.

The fiscal support would be most effective if it enhances the public healthcare system, strengthens the social safety net, focuses on the public investment spending on areas to tackle climate change, such as green technology and clean transport.

“As in many other countries, China’s government debt has risen during the crisis and policymakers will have to adjust fiscal policy over the medium term once the crisis is behind us,” he said.

In the US, Gasper said that the American policymakers have rightly taken bold actions to protect livelihoods and businesses and minimise the economic damage from the pandemic.

Over the coming months, the US should use its considerable fiscal space to hasten the economic recovery, increase health preparedness, support the most vulnerable, and facilitate a broader remaking of the post-pandemic US economy.

“It will be important to ensure that policy solutions put in place are simultaneously geared towards reshaping the existing systems for social assistance, education and healthcare; and, investing in green technologies to propel the US towards a lower-carbon future,” he said.

With the public debt already on a rising path prior to the COVID-19 outbreak, once the economy is on a much firmer footing, the fiscal adjustment will be needed to stabilise debt, the IMF official said.

According to Gasper, in the absence of an effective vaccine or therapeutic to overcome the health crisis, uncertainty remains on the path of recovery. As such, fiscal policy will need to remain accommodative and flexible to better protect people, support firms, and facilitate the transition to a more resilient digital and green economy.

An earlier than warranted exit from the targeted support -- such as wage subsidies for furloughed workers, cash transfers and loan guarantees -- could derail the recovery and incur larger fiscal costs going forward, he said.

Once an effective solution to the health crisis is available worldwide, and countries exit the great lockdown durably and safely, the policymakers will need to address structural weaknesses exposed by the crisis.

“An international coordination is absolutely necessary to ensure low income and developing economies with large development needs and financing constraints have access to bilateral and multilateral financing, including on concessional terms; and poor nations receive continued debt relief,” Gasper added.