IMF urges fiscal restraint as half the world goes to polls

The International Monetary Fund (IMF) has called on governments to pursue fiscal restraint in a year when more than half of the world goes to polls.

Many countries continue to struggle with high public debt and fiscal deficits amid new challenges from high real interest rates and dimming medium-term growth prospects, IMF said.

Only half of the world’s economies tightened fiscal policy last year, down from about 70% in 2022.

This situation persists despite improving global economic and financial outlook on declining inflation, easing financial conditions and a balanced risk outlook over the past six months, IMF said.

Global public debt edged up to 93% of gross domestic product (GDP) in 2023 and stayed 9 percentage points above the prepandemic level. The increase was led by the two largest economies, US and China.

Spending more and taxing less

In 2024, a record number of countries, home to more than half of the world’s population, are holding national elections.

“History shows governments tend to spend more and tax less during election years. Deficits in election years tend to exceed forecasts by 0.4 percentage points of GDP, compared to non-election years. In this great election year, governments should exercise fiscal restraint to preserve sound public finances,” IMF said.

Fiscal policy shifted to be more expansionary last year after a rapid improvement in debt and deficits in the earlier two years, the multilateral body said, while asking governments to focus more on rebuilding buffers and safeguarding fiscal sustainability over the medium term.

Four years after the start of the pandemic, public spending, excluding interest payments, remained about 3 percentage points of GDP above prepandemic projections in advanced economies, excluding the US, and 2 percentage points above them in emerging market economies, excluding China.

This spending level reflects the slow unwinding of crisis-era fiscal policies and the introduction of new support measures, alongside new industrial policy measures including subsidies and tax incentives. Higher nominal interest rates pushed up interest payments in most economies, it said.

IMF suggested that governments should immediately phase out legacies of crisis-era fiscal policy, including energy subsidies, and pursue reforms to curb rising spending while protecting the most vulnerable.

Advanced economies with aging populations should contain spending pressures for health and pensions through entitlement reforms and other measures, it added.

It further said revenues should keep up with spending over time.

“In advanced economies, targeting excessive profits as part of the corporate income tax system could further bolster revenues. Emerging market and developing economies could raise their tax revenue potential by broadening tax bases, improving the design of their tax systems, and strengthening revenue administration,” IMF added.