IMF director warns against reducing public investment amid fiscal reforms

Vitor Gaspar, director of fiscal policy at the International Monetary Fund (IMF), says fiscal consolidation should not take place at the expense of public investment.

Gaspar spoke during the virtual launch of the 2024 IMF Global Debt Database on Tuesday.

He said fiscal consolidation is crucial but should not harm economic growth, as cuts in public investment are very costly for growth in both the short and long term.

“The fiscal equation outlined synthesised in the fiscal policy trilemma is hard to balance given the political difficulties, but it however must be maintained if one is to live in a world of fiscal sustainability and financial stability,” Gaspar said.

Addressing IMF’s warnings to countries regarding reducing public sector debt, Gaspar said the global debt is about $100 trillion for 2024, which corresponds to 93 percent of the global gross domestic product (GDP).

“We regard this level as an uncomfortably high level as risks to public debt, and we put out this new tool public debt at risk,” he said.

“We do quantify risks as being tilted to the upside.

“Distributions are not symmetric, where risks are one-sided when it comes to public debt.

“We did emphasise in the fiscal monitor upside risks to projections, and we argue that it will be important for most countries around the world to deliver declining public debt ratios with high probability, with high confidence.

“We further argue that current plans do not deliver that, so that is a recommendation and one of the main messages from the annual meetings.”

He also highlighted the role of fiscal and structural policies in fostering inclusive and sustainable growth.

“The combination of high debt with low growth was one of the features that was most emphasised by the managing director of IMF, Kristalina Georgieva, and fiscal policy can do a lot to foster sustainable and inclusive growth, including the transition to a green economy,” the director said.

Gaspar said fiscal policy can ensure growth by promoting technological change and innovation and fostering public investment.