Government debt to soar

Government debt is expected to rise by over 14% of GDP this year in advanced G20 countries, the International Monetary Fund (IMF) Survey Magazine reports.

Reflecting the full impact of financial support operations – most of which have not yet been included in fiscal balances – government debt is expected to increase at its fastest pace since the second world war.

The fiscal balance in advanced and emerging countries of the G20 is expected to deteriorate by, respectively, 6% and 3.5% of GDP between 2008 and 2009.

The IMF says that the cost of fiscal stimulus packages will be large. Tax revenue losses from output decline and the price of financial sector restructuring will increase the burden.

IMF staff papers say that the supportive role of fiscal policy is large.

As a result, given the depth of the crisis, avoiding or postponing action is not a viable option: the fund cautions that failing to act soon enough would risk making the recession deeper or longer.

The IMF’s four-pillar strategy for fiscal solvency says fiscal stimulus packages should mainly consist of temporary measures rather than becoming permanent.

Policies should be formulated within forward-looking medium-term frameworks, supported by institutional arrangements, says the fund. The IMF says that growth potential should be enhanced by structural reforms.