G7-Countries In Deep Trouble

All G7 countries, except Canada and Germany, will have debt-to-GDP ratios close to or exceeding 100 percent by 2014, according to first deputy managing director of the International Monetary Fund, John Lipsky, Advanced economies face acute challenges in tackling high public debt, and unwinding existing stimulus measures will not come close to bringing deficits back to prudent levels, he says.

“This surge in government debt is occurring at a time when pressure from rising health and pension spending is building up.”

John Lipsky

The G7 finance ministers and central bank governors

All G7 countries, except Canada and Germany, will have debt-to-GDP ratios close to or exceeding 100 percent by 2014, John Lipsky said in a speech at the China Development Forum in Beijing, Sunday. Already this year, the average ratio in advanced economies is expected to reach the levels seen in 1950, after World War II, he said.

Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures will not come close to bringing deficits back to prudent levels, says the first deputy managing director of the International Monetary Fund.

Adding that the government debt ratio in some emerging market nations had also reached a “worrisome level.”


“This surge in government debt is occurring at a time when pressure from rising health and pension spending is building up,” Lipsky said.

Stimulus measures account for about one-tenth of the projected debt increase, and rolling them back won’t be enough to bring deficits and debt ratios back to prudent levels.

“Maintaining public debt at its post-crisis levels could cut potential growth in advanced economies by as much as half a percentage point annually, compared with pre-crisis performance.”

The Washington-based IMF, which rescued countries including Pakistan and Iceland during the recession, expects global growth of about 4 percent this year, and a somewhat faster pace in 2011, reflecting expansionary fiscal and monetary policies, Lipsky says.

The IMF-leader says inflation is “clearly not the answer” as a moderate increase in inflation would have a limited effect, while accelerating inflation would impose major economic costs and create significant risks to a sustained expansion.

“Instead, growth-enhancing reforms such as liberalization of goods and labor markets, as well as the removal of tax distortions should be pursued vigorously.”

Lipsky thinks the bulk of the needed debt reduction should be focused on reforms of pension and health entitlements, containment of other primary spending and increased tax revenues and improving both tax policy and tax administration measures.

“For most advanced economies, maintaining fiscal stimulus in 2010 remains appropriate,” the IMF official says.

Still, fiscal consolidation should begin in 2011 if the recovery occurs at the projected pace. Some actions should be undertaken now by all countries that will need fiscal adjustment, he said.

Lipsky also point out that it was “fully appropriate” for China to maintain its fiscal stimulus through this year, while seeking to rein in its rapid loan growth.

He says fiscal consolidation would be appropriate in the U.S., where a higher public savings rate will be required to ensure long-term fiscal sustainability.

Source: Bloomberg News.

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