September 2, 2010IMF calls for global fiscal reform and warns UK over debt
The International Monetary Fund has said long-term fiscal reforms are required by the world’s economies to reduce public debt and warned the UK’s gross debt to GDP will rise to 90.6% in 2015.
The US-based fund said while some countries, such as the UK, had made a start on the reform process with the introduction of independent ‘fiscal agents’, more action will be needed to address the "formidable challenge" of reducing debt ratios over the coming years.
In one of three reports released by the IMF, it said the UK’s debt to GDP would more than double by 2015 from 44.1% in 2007. The case was much the same for other developed economies, with US debt set to rise from 62.1% in 2007 to 109.7% in 2015. Meanwhile, Japan’s debt will remain the worst of all developed economies increasing by over 60% from 187.7% in 2007 to 250% in 2015.
No "quick fix"
The IMF said in order to protect the fragile economic recovery, support growth and job creation and provide reassurance to markets, fiscal measures put in place must be “clearly defined” with an emphasis on the medium term father than seeking a “quick fix.”
Carlo Cottarelli, director of the IMF’s fiscal affairs department and the author of both the ‘Long-Term Trends in Public Finances in the G-7 Economies’ and ‘Default in Today’s Advanced Economies: Unnecessary, Undesirable, and Unlikely’ reports, warned public debt levels among the world’s advanced economies have reached levels not seen in the absence of a major war.
“High public debt is due not only to the financial crisis, but also to weak fiscal policy over the preceding decades, when debt levels ratcheted up during hard times but failed to fall in better years,” said Cottarelli.
“The task ahead is all the more complicated because aging societies and global warming are putting additional pressure on public finances. This calls attention to the critical need for long-term fiscal reforms that will guarantee a gradual but sustained improvement in debt positions over the coming decades.”
Debt limit
The IMF also warned that the most indebted economies are reaching a “debt limit” beyond which their fiscal positions may become unsustainable. Jonathan Ostry, deputy director of the IMF’s research department and author of ‘Fiscal Space’ said: “Debt limits are not etched in stone, but they show that a fundamental change in behaviour relative to historical patterns will be needed to restore sustainability. In other words, ‘business as usual’ won’t cut it.”
