By IB Times Staff Reporter: Subscribe to IB's RSS feed
September 2, 2010 11:28 AM EDT
Advanced economies which are severely impacted by global economic crisis must adopt detailed long-term plans to cut their debt levels in the coming years, said a report by the International Monetary Fund (IMF).
To protect fragile economic recovery, promote long-term growth, create jobs and strengthen financial markets, governments are required to evolve credible fiscal plans with emphasis on long-term solutions rather than looking for quick remedies, IMF said.
“Public debt levels among advanced economies have reached levels not seen before in the absence of a major war,” said Carlo Cottarelli, Director of the IMF’s Fiscal Affairs Department.
General government debt in the G20 advanced economies witnessed a drastic increase from 78 per cent of gross domestic product (GDP) in 2007 to 97 per cent of GDP in 2009. It is projected to rise 115 percent of GDP in 2015, the report said.
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IMF states that as the main problem in the advanced economies is high primary deficits, default on sovereign debt would be insignificant in the scenario of high debt.
Poor fiscal policy followed by these economies before crisis failed to adequately address government deficits especially at the time of strong growth, said the global lender.
"High public debt is due not only to the financial crisis, but also to weak fiscal policy over the preceding decades, when debt levels ratcheted up during hard times but failed to fall in better years," said Cottarelli.
Therefore, countries should rectify their past behavior and prepare detailed fiscal plans for long-term which also covers pension and health care reforms, the report noted.
“A credible future course for policy that differs fundamentally from normal historical patterns is needed when fiscal space—the difference between current and maximum sustainable public debt—is limited,” said IMF.
The report notes that to effectively address debt burden, fiscal policy in advanced economies can no longer continue on a “business as usual” basis.
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