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Global public debt and budget deficits to hit record high in FY21: IMF

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A senior IMF official warned on Friday that global public debt is expected to exceed 100% of GDP in 2020-2021, and that the average overall budget deficit is expected to reach 14% of GDP in 2020, stressing that public debt and deficits are never ‘grew so high and so fast.

The sharp contraction in production and the resulting drop in income, along with strong discretionary support, led to increased public debt and deficits, Vitor Gaspar, director of the Fund’s fiscal affairs department, told PTI. international monetary policy (IMF).

Global public debt is expected to hit a record high, exceeding 100 percent of GDP in 2020-2021, an increase of nearly 20 percentage points from a year ago, he said, adding that the Debt increase is greatest among advanced economies such as the United States, Japan and those in Europe.

At the same time, the average overall budget deficit is expected to reach 14% of GDP in 2020, 10 percentage points higher than last year. Never have public debt and deficits increased so high and so quickly, he said.

Along with these record levels of global public debt, however, are record levels of nominal interest rates, in both advanced and emerging market economies, Gasper noted.

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

Nonetheless, caution is in order, said Gasper, observing that many advanced economies face long-term fiscal pressures, especially due to population aging, which can weigh on long-term debt sustainability.

Some emerging market economies could face costly debt refinancing if financial conditions tighten again, as they did in March, the IMF official warned.

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

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

Responding to a question, Gasper said that in China, the recovery is now well advanced, as national containment measures have been withdrawn and political support has strengthened.

In response to the initial outbreak, the authorities provided timely and targeted budget support to the health sector and the most affected businesses and households, which mitigated the impact of the outbreak on employment, contributing to avoid unnecessary bankruptcies and helped protect the vulnerable, he said.

Overall budget support is expected to amount to around 5.8 percentage points of GDP.

Of course, if the recovery fails, China will have to do more, and it has the fiscal leeway to do so, he said.

Budget support would be more effective if it improves the public health system, strengthens the social safety net, focuses on public investment spending in areas to combat climate change, such as green technologies and transport clean.

As in many other countries, China’s public debt increased during the crisis and policymakers will need to adjust medium-term fiscal policy once the crisis is behind us, he said.

In the United States, Gasper said American policymakers have rightly taken bold steps to protect livelihoods and businesses and minimize the economic damage from the pandemic.

Over the next few months, the United States is expected to use its considerable fiscal space to accelerate economic recovery, improve health preparedness, support the most vulnerable, and facilitate a broader overhaul of the post-pandemic US economy.

It will be important to ensure that the political solutions put in place are simultaneously oriented towards the overhaul of the existing systems of social assistance, education and health care; and investing in green technologies to propel the United States towards a low-carbon future, he said.

With public debt already on an upward trajectory before the Covid-19 epidemic, once the economy is on a much stronger footing, fiscal adjustment will be needed to stabilize debt, the IMF official said.

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

An earlier than justified exit from targeted support – such as wage subsidies for workers on leave, cash transfers and loan guarantees – could derail the recovery and lead to greater fiscal costs in the future, a- he declared.

Once an effective solution to the health crisis is available in the world and countries emerge safely and sustainably from deep containment, policymakers will need to address the structural weaknesses exposed by the crisis.

International coordination is absolutely necessary to ensure that low-income and developing economies with great development needs and financing constraints have access to bilateral and multilateral finance, including on concessional terms; and poor nations benefit from continued debt relief, Gasper added.