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Maintain Fiscal Support, but Devise Credible Exit Strategies, IMF’s Fiscal Monitor Says

November 3, 2009: Fiscal policy will continue to provide substantial support to aggregate demand in most countries this year, and is projected to remain supportive of economic activity in advanced countries in 2010, the International Monetary Fund (IMF) said in its latest edition of the Cross-Country Fiscal Monitor. Though maintenance of fiscal support remains appropriate, governments need to devise and communicate credible exit strategies now.

The Fiscal Monitor draws on projections from the October 2009 World Economic Outlook and shows that:

• Across the G-20,1 the average overall deficit is projected to fall from 7.9 percent of GDP in 2009 to 6.9 percent of GDP next year, both figures somewhat better than projected in the July 2009 Fiscal Monitor. However, excluding losses from financial sector support measures, deficits are projected to widen in advanced G-20 economies in 2010, with reduced stimulus measures more than offset by higher automatic stabilizers as the output gap widens, and by increases in other types of spending.

• Government debt in advanced G-20 economies is projected to reach 118 percent of GDP in 2014. New IMF research confirms that stabilizing debt at these levels would imply increases in interest rates of up to 2 percentage points globally. Communication of exit strategies now can help contain any potential adverse market response.

• Credible exit strategies for advanced countries will need to go well beyond the non-renewal of stimulus measures. Weak pre-crisis structural fiscal positions in many countries have been further eroded by underlying spending pressures. To get debt below 60 percent by 2030 will require raising the average structural primary balance by 8 percentage points of GDP over 2010-20 and then keeping it there for a further decade. This could be achieved by a combination of non-renewal of stimulus measures; a freeze in real per capita spending excluding pensions and health; reforms to keep the growth of pension and health spending in line with that of GDP; and tax increases averaging about 3 percentage points of GDP for advanced G-20 countries.

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