May 14, 2010 / 3:03 PM / 10 years ago

High public debt may strain growth for years-IMF

By Emily Kaiser

WASHINGTON, May 14 (Reuters) - Advanced economies face a herculean task to restore public debt to pre-crisis levels, and failure to do so will drive up borrowing costs and curb economic gr 536870913 1870099560

If government debt is not reduced, potential growth in rich countries could decline by more than 0.5 percent annually, the International Monetary Fund said in its “Fiscal Monitor” report, 536870913 544696425

In order to accomplish that, advanced economies will need to reverse current account deficits, which now average 4.9 percent, into an average surplus of 3.8 percent by 2020.

That will require a mix of spending cuts and tax increases, neither of which is popular, so mustering the political will to enact those changes may prove difficult.

But the IMF said Europes debt troubles, which pushed Greece to the brink of default and forced officials to cobble together a $1 trillion rescue package, showed that if governments fail 1953439841

The IMF said it was sensitive to concerns that focusing on public finance repairs too soon would undermine the recovery, but thought more planning could be done now.

Most advanced economies are still feeling the effects of the deepest recession since World War Two. Unemployment remains high, and tax revenues have fallen.

“I am convinced that there is much that countries can do now to strengthen confidence in long-term fiscal sustainability without weakening growth prospects,” IMF Managing Director Dominiq 536870913 1969561683

Total loss of investor confidence in public finances is an unlikely “tail risk,” the IMF said, although it added that Europes recent experiences “have clearly indicated that this risk ca 1852731252

Across the Group of Seven richest countries, government debt as a percentage of total output — or debt-to-GDP — is rising to levels exceeding those prevailing in the aftermath of World 1466004000

Based on current likely policies, debt-to-GDP ratios in advanced economies will probably rise another 20 percentage points to 110 percent by 2015, the IMF estimated. Before the financial 1668442483


The IMF said countries may be inclined to simply stabilize debt where it is now rather than restoring it to pre-crisis levels, but that would likely slow economic growth.

For many advanced economies, including the United States and Japan, aging populations will put even greater strain on finances in the coming years.

The oldest of the U.S. Baby Boomer generation, born in the years after World War Two, turn 65 next year, making them eligible for full retirement and healthcare benefits. The IMF said rai 536870913 1936289383

It also suggested improving collection of value-added taxes in countries that already have such measures, and implementing them in places like the United States that do not.

“For instance, introducing a VAT in the United States, and doubling the very low VAT rate in Japan, could raise 4.5 percent and 2.6 percent of GDP, respectively, in those countries,” the 1182101092

Other useful options include increasing levies on alcohol, tobacco and fuel, adopting a tax on carbon emissions, and raising property taxes. (For a factbox on government debt, click on [ID:nN14149005]) (For a factbox on 2010 funding needs, click on [ID:nN14136632]) (Editing by Andrea Ricci)

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