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IMF sounds alarm on excessive global borrowing (FT)

“The IMF on Wednesday sounded the alarm on excessive global borrowing, warning that with a total of $164tn owed, the world’s public and private sectors are deeper in debt than at the height of the financial crisis a decade ago.

Global debt is now more than twice the size of the value of goods and services produced every year and at 225 per cent of global gross domestic product, it is now 12 percentage points higher than at its previous peak in 2009.

The fund said there was now an urgent need to reduce the burden of debt in both the private and public sectors to improve the resilience of the global economy and provide greater firefighting capability if things went wrong.

“Fiscal stimulus to support demand is no longer the priority,” the IMF said in its latest Fiscal Monitor, one of the reports published at its Spring meetings in Washington.

Half of the $164tr global public and private sector debt is accounted for by three countries: the US, Japan and China. The latter, where debt surged from $1.7tr in 2001 to $25.5tr in 2016, was described as the “driving force” behind the increase in global debts, accounting for three-quarters of the rise in private sector debt in the past decade.

Vitor Gaspar, director of fiscal affairs at the IMF, singled out the US for criticism, saying it was the only advanced country that was not planning to have a falling burden of debt because tax cuts would keep public borrowing high.

“We urge policymakers to avoid pro-cyclical policy actions that provide unnecessary stimulus when economic activity is already pacing up,” he said.

The fund was concerned that private sector debts make the global economy more vulnerable to a new financial crisis started by “an abrupt deleveraging process” where borrowers all tighten their belts simultaneously, sending the economy into a nosedive.

“In the event of a financial crisis, a weak fiscal position increases the depth and duration of the ensuing recession, as the ability to conduct countercyclical fiscal policy is significantly curtailed,” the fund said.

With the global economy growing strongly, it recommended countries stop using lower taxes or higher public spending to stimulate growth and instead try to reduce the burden of public sector debts so that countries have more leeway to act in the next recession.

The IMF singled out the Trump administration’s tax cuts for criticism, since they left the US with a deficit of 5 per cent of national income into the medium term and a persistently rising level of debt in GDP.

“In the United States . . . fiscal policy should be recalibrated to ensure that the government debt-to-GDP ratio declines over the medium term. This should be achieved by mobilising higher revenues and gradually curbing public spending dynamics, while shifting its composition toward much-needed infrastructure investment.”

There is no sign that the Trump administration has any intention of increasing taxes as the IMF recommends and, instead, hopes that faster growth will supply the necessary revenues, something the fund and the US fiscal watchdog thinks is highly unlikely.

The debt problem is not limited to advanced economies, with middle-income countries racking up borrowing higher than that which led to the debt crises of the 1980s.

The IMF recommended that countries raise taxes and lower public spending to decrease annual borrowing and get the burden of debt on a firmly downward path now that there is no need for fiscal stimulus.

The few exceptions to that advice included Germany and the Netherlands, which the IMF said had “ample fiscal space” to boost public investment in infrastructure and enhance the long-term resilience of their economies.”



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