Committee for a Responsible Federal Budget

Some Wise Words from the IMF

Jul 8, 2010

Last week, Murilo Portugal, the Deputy Managing Director of the IMF, gave the opening speech at the IMF Forum in Stockholm. In his remarks, he succinctly distilled the global debt problem into a simple message:

“Concerns about fiscal and debt sustainability in advanced economies, if left untreated, can undermine the economic recovery and jeopardize global financial stability.”

He stressed the importance of presenting a fiscal turnaround plan to reassure a cautious market, coming a hair’s width away from joining our Announcement Effect Club, but failing to mention the mere "announcement" specifically. An honorary membership might be considered, however:

“Reassuring markets about fiscal sustainability is critical to preserve the recovery and contain volatility in sovereign debt markets. Deteriorating fiscal fundamentals need to be credibly addressed; governments urgently need to communicate fiscal consolidation strategies specifying the measures and the timetable for implementing them. The strategic goal should be to reverse the rise in debt, not just to stabilize it at post-crisis level.”

After laying out his case for fiscal consolidation, Mr. Portugal presents a common-sense set of solutions for the world’s heavy-debtor economies. Eschewing immediate fiscal consolidation in advanced economies lest the fledging recovery falter, he claims that most countries don’t have to immediately tighten their belt, except for those already in crisis mode (see: Greece, Spain). However, Mr. Portugal feels that a plan for medium- and long-term consolidation is essential, and stresses its formulation as soon as possible.

For nations with little to no debt, Mr. Portugal recommends monetary tightening and exchange rate adjustment instead of fiscal measures. All these measures seem to take the middle road between immediate, harsh fiscal austerity and unsustainable budget growth. Let’s just hope people listen.

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