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April 09, 2014

IMF: Rich Nations' Debt Stabilized, Public Investment Needed

by Reuters

Public debt in the world's richest nations has stabilized after being nearly halved since the global financial crisis, but remains at historic highs as pressure mounts on governments to spend more in the coming years, the IMF said on Wednesday.
 
The Fund, which analyzes the economic policies of its 188 member countries, also warned in its twice-yearly Fiscal Monitor report that the world's falling stock of public capital could crimp future economic growth.
 
Public capital refers to government-owned physical assets such as highways, airports, sewage systems and other infrastructure that contribute to productivity, resulting in economic growth.
 
The IMF report shows the competing pressures on governments, and the difficulty of fulfilling the Group of 20 nations' pledge in February to lift global output by an extra 2 percent over five years amid already-high debt levels.
 
The IMF said advanced economies could slow some of their debt-cutting this year to reduce the drag on growth, but they cannot stop entirely, as their debt is likely to stay stuck above 100 percent of national output by 2019.
 
Emerging markets, however, should also pay more attention to debt and deficit levels, especially because interest rates will rise when advanced nations start to tighten monetary policy.
 
“Those emerging market economies with large debt and deficits and most vulnerable to market volatility should start to rein in deficits now,” Sanjeev Gupta, the acting director of the IMF's fiscal affairs department, said in prepared remarks.
 
But richer nations will see their social spending increase in the coming years as populations age. And in emerging markets, citizens are likely to demand more services and public goods as incomes rise.
 
Countries should consider implementing reforms to ensure social spending remains sustainable, including raising the retirement age, the IMF said. Setting limits or rules on how much a government can spend could also help, it said.
 
Public investment needed
 
The IMF also warned that advanced countries were so focused on cutting debt in recent years that they ignored public investment, contributing to the decline in public capital.
 
“With private investment also falling in many economies, cutbacks in government investment may hinder medium- and long-term growth,” the IMF said in the report.
 
Richer nations should consider partnering more with the private sector, or even increasing public investment as long as it provides a good rate of return. The IMF estimated that government investment would need to rise by almost 2 percentage points of GDP through 2030 in advanced economies just to stem the decline in public capital.
 
The IMF said emerging markets also needed to focus on reducing wasteful public investment, noting that only half of the heavy increase in government investment from 1980 to 2012 had flowed into productive capital.
 
“Inefficiencies reflect the poor quality of the projects selected and the weakness of public investment management processes such as procurement and auditing,” the Fund said.
 
Getting rid of all inefficiencies by 2030 would give the same boost to public capital as increasing government spending by 5 percentage points of GDP in emerging markets, and by 14 percentage points of GDP in the poorest countries.