Austerity is over: after five years of belt tightening, the IMF says the rich world has stopped cutting

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[There are plenty of 'alternative facts' when it comes to something as seemingly objective as economic policy and the results thereof. So, in one day, we have this story, which says "Austerity is over", then this one: IMF Demands More Austerity Despite Greek Surplus. Then we have a story in which the IMF claims the economy is improving thanks to austerity: World Economic Outlook, April 2017: Gaining Momentum? followed by one in which two countries practicing austerity crash and burn: IMF lowers growth expectations for Egypt and Saudi Arabia. *RON*)

Tim Wallace, The Telegraph, 19 April 2017

Philip Hammond reduced the pace of deficit reduction in his first budget, and the rich world overall has stopped cutting, according to the IMF CREDIT: MATT DUNHAM/AP PHOTO
Austerity is over as governments across the rich world increased spending last year and plan to keep their wallets open for the foreseeable future.

After five years of belt tightening, the International Monetary Fund says the era of spending cuts that followed the financial crisis is now at an end.

“Advanced economies eased their fiscal stance by one-fifth of 1pc of GDP in 2016, breaking a five-year trend of gradual fiscal consolidation,” said the IMF in its fiscal monitor.

“Their aggregate fiscal stance is expected to remain broadly neutral in 2017 as well as in the following years."

The British Government is still trying to reduce the deficit but at a slower pace, as Philip Hammond, the Chancellor, wanted to ease spending cuts following the vote for Brexit last year.

Although extra spending may be welcomed by those who want funds for specific projects or public services, the IMF is worried that governments are still heavily indebted and need to be careful with their budgets.

The US government, for instance, should use the current economic growth spurt as a chance to get its finances under control.

“In the United States, where the economy is close to full employment, fiscal consolidation could start next year to put debt firmly on a downward path,” the IMF said.

That contrasts heavily with President Donald Trump’s plans to spend more on infrastructure and defence while cutting taxes, a combination that risks ramping up the budget deficit.

“These policies are expected to generate rising deficits over the medium term. As a result, the US debt ratio is projected to increase continuously over the five-year forecast horizon,” the IMF warned.

Overall the IMF believes government debts “should stabilise in the medium term, averaging more than 100pc of GDP, rather than decline as previously expected.”

With debts that high, governments have to walk a fine line to use fiscal policy to support sustainable economic growth, but avoid dangerous over-indebtedness.

“Fiscal policy is generally seen as a powerful tool for promoting inclusive growth and can contribute to stabilising the economy, particularly during deep recessions and when monetary policy has become less effective,” said the IMF.

“At the same time, high debt levels, long-term demographic challenges, and elevated fiscal risks place a premium on sound public financial management. In particular, policies should be anchored within a credible medium-term framework that ensures debt sustainability, manages risks adequately, and encourages countries to build buffers during upturns.”

In particular it recommends investing in infrastructure and in education as ways to boost long-term economic growth and to reduce inequality.

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