The International Monetary Fund (IMF) has forecast strong and broad-based growth for 2018 in its’ biannual World Economic Outlook report. However, beyond the near-term optimism, the IMF has expressed the need to use growth to reduce government debt.
Since the financial crisis global debt has surged to 225 percent of world GDP in 2016. Government debt is at historic highs among both advanced and emerging market economies with 43 percent of the $48tn increase in global debt since 2007 attributed to China.
In the short-term, rapidly rising debt, particularly among low income developing countries, means interest payments take up an increasingly large share of taxes and expenditure which can harm growth and reduce the ability of governments to spend on welfare, infrastructure or other programs. Countries with high government debt are increasingly vulnerable to potential shocks in global economic conditions.
This could further increase the cost of future lending to fund government spending. Importantly, large debt and deficits hinder governments’ ability to support the economy in the event of a downturn.
The fund emphasises the importance of putting deficits and debt firmly on a downward path toward their medium-term targets in order to build resilience while the global economy is healthy, saying “decisive action is needed now”.
“It is important to note that building buffers now will help protect the economy, both by creating room for fiscal policy to step in to support economic activity during a downturn and by reducing the risk of financing difficulties if global financial conditions tighten suddenly.”
The IMF singled out the US as the only advanced economy that is failing to plan to reduce their debt-to-GDP ratio in the medium term as a result of the Trump administration tax cuts which is anticipated to increase the US debt-to-GDP ratio by 9 percentage points by 2023.
Gaspar, director of the IMF’s fiscal affairs department said: “We urge policymakers to avoid procyclical policy actions that provide unnecessary stimulus when economic activity is already pacing up.”