IMF warns wealthy nations to watch debt

By Associated Press
Monday, March 22, 2010

BEIJING -- The International Monetary Fund warned the world's wealthiest nations Sunday to watch their surging levels of government debt, saying it could drag down the growth needed to ensure continued economic recovery.

The economic crisis is leaving "deep scars in fiscal balances, particularly in the advanced economies," John Lipsky, the IMF's No. 2 official, told the China Development Forum in Beijing. He said countries that have been going into debt to stimulate their economies should prepare for belt-tightening steps next year.

"Policymakers should be making it clear to their citizens why a return to prudent policies is a necessary condition for sustained economic health," said Lipsky, who is the fund's deputy managing director, according to remarks prepared for the conference.

The IMF projects that gross general government debt in the Group of Seven advanced economies, except Germany and Canada, will rise from an average of about 75 percent of GDP at the end of 2007 to about 110 percent of GDP at the end of 2014, Lipsky said.

This year, the average debt-to-GDP ratio in the wealthiest countries is projected to reach levels that prevailed in 1950 in the aftermath of World War II, Lipsky said. The ballooning of government debt also comes amid rising health and pension spending, he said.

"Addressing this fiscal challenge is a key near-term priority, as concerns about fiscal sustainability could undermine confidence in the economic recovery," Lipsky said, adding that in the medium term, large public debt could lead to higher interest rates and slower growth.

Countries should aggressively pursue changes that will boost growth, such as the liberalization of goods and labor markets and the elimination of tax distortions, he said, although such moves on their own will be insufficient without direct measures to reduce spending.

They should also strengthen fiscal institutions in ways that could include improving tax collection, reinforcing fiscal responsibility legislation and pursuing entitlement changes, such as increasing the retirement age, to help in restoring finances, he said.

Lipsky said a higher public savings rate will be required to ensure the long-term fiscal sustainability of the United States.

"An increase in public saving would augment an expected rise in household saving to boost national saving and reduce the current account deficit," he said.

America's national debt -- $12.5 trillion -- has been growing by leaps and bounds over the past decade and threatens to swamp overall economic output. About half of it is owned by global investors, with China holding the largest stake.

Japan's debt is proportionately even bigger -- about twice its GDP -- but the impact is cushioned because most is held by Japanese households.

In Europe and Japan, where there is a high tax burden on labor, Lipsky said measures should focus on improving the targeting of social benefits and on reducing exemptions on indirect taxes.

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