Committee for a Responsible Federal Budget

IMF Emphasizes Need for Fiscal Reform

Sep 2, 2010

An IMF paper released today details the long-run fiscal outlook for the G7 nations. Authors Carlo Cottarelli and Andrea Schaechter wrote about the need for fiscal adjustment in order to ensure long-term sustainability and prevent any defaults on national debt. Yet they tempered this call for reform with the acknowledgement that it “cannot be too abrupt”—as we emerge from the recent global financial crisis, our economic recovery is too precarious for excessively sudden or dramatic change. Cottarelli and Schaechter argue for a “downsizing of government, but without preventing it from playing a key role in the provision of basic services.”

Now is the time, they argue, to tackle the public debt problem that has been growing around the world for decades—and even though it will be difficult to do, if we don’t, we run the risk of a far worse financial crisis than what we’ve recently witnessed. G7 economies will face the challenge of “reducing debt ratios at a time when aging-related spending will put additional pressure on public finances.” In order to put the focus on long-term fiscal sustainability, Cottarelli and Schaechter advocate “growth-friendly structural reforms, a fiscal strategy involving gradual but steady fiscal adjustment, stronger fiscal institutions, expenditure and revenue reforms, and an appropriate degree of burden sharing across all stakeholders.”

Furthermore, Cottarelli and Schaechter argue that right now is a good time to implement these reforms because of the “current environment of low interest rates,” which has kept debt service payments relatively low despite ballooning debt principal levels. The time for action is now, they say, because interest rates may not stay low much longer, and the additional fiscal burden placed on G7 economies by steadily increasing debt service payments might be too much to bear, increasing the risk of default.