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Economic Policies Impacting EU Finance
23 April 2010

IMF: Strategies needed to tackle huge government debt levels


Speaking at a conference on fiscal strategies after the crisis in Washington, IMF first Deputy Director Lipsky proposed a plan for fiscal consolidation based on stabilizing age-related spending as a share of GDP and raising additional revenues in an efficient and equitable manner.

With the world economy on the mend following the global crisis, policymakers, particularly in advanced economies, should begin to focus on how to bring down the level of their huge government debts through a combination of spending reforms and increased revenues, said John Lipsky, First Deputy Managing Director of the International Monetary Fund.
Governments around the world jacked up spending to help combat the global crisis. But the loss of revenue from the recessions has saddled governments with a dramatic increase in official debts.
The IMF projects that public debt in the advanced economies will rise by over 35 percentage points of GDP between end-2007 and 2015, to 110 percent of GDP. Most of this increase reflects revenue losses arising from the crisis and only one-tenth of the increase came from anti-crisis stimulus measures. IMF Managing Director Dominique Strauss-Kahn noted the rise in debt would have been bigger without the stimulus.
Lipsky said governments must now plan on getting debt levels under control over the next two decades through a process of fiscal consolidation that reverses the rise.
The IMF has said that rising government borrowing represents a growing risk to the recovering global economy, but has advised that stimulus measures in most advanced economies should be completed as planned for 2010 because the recovery remains fragile.
Fiscal consolidation plan
Speaking at a two-day conference on fiscal strategies after the crisis in Washington, Lipsky noted that details of any strategy would need to be country specific. He proposed an outline plan for fiscal consolidation and strengthening public finances in advanced economies that rests on three pillars:
• Stabilizing age-related spending—health and pensions—as a share of GDP (going beyond this is unlikely to be possible given demographic trends);
• Reducing other non-age related spending items in relation to GDP; and
• Raising additional revenues in an efficient and equitable manner.
Consumption taxes
On the tax side, boosting revenue in a globalized economy will require strengthening broad-based taxes on relatively immobile bases. These mainly include consumption taxes and externality correcting taxes, such as those applied to petroleum products.
More specifically, Lipsky said there is substantial scope for improving the revenue performance of the Value-Added Tax or VAT in almost all countries. In the largest advanced countries, the reform of exemptions and the elimination of reduced rates could raise a weighted average of about 2 percentage points of GDP, merely by closing half this estimated policy gap. Many countries have scope to increase significantly revenues from excises on tobacco and alcohol.
Property taxes are also an efficient source of revenues with a benign impact on growth. Pricing greenhouse gas emissions—either by taxing carbon or by auctioning emissions permits—could raise large sums.


© International Monetary Fund


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