Governments tend to turn on the public spending tap during election times. This 2024 is the election year par excellence, in which a record number of countries, which are home to more than half of the world’s population, are called to the polls to elect their Government. The International Monetary Fund (IMF) fears that deficits will deviate at a time when public accounts are not yet healthy and asks governments for fiscal moderation. Along with this, the IMF calls for taxing excessive company profits in corporate tax and addressing reforms to contain spending on healthcare and pensions.
The Fund is concerned about the impact that the pandemic and the recent inflationary process have had on public finances. Four years after the Covid outbreak, fiscal deficits and debts are higher than pre-pandemic forecasts. Rising interest rates have raised interest expenses, while spending on social benefits, subsidies and transfers has been boosted by expanded support measures enacted in response to the pandemic and commodity price shocks. energy. And with that, the elections arrive.
“The risks of fiscal slippage are especially serious given that 2024 is what has been called the Great Election Year: 88 economies or economic areas representing more than half of the world’s population and GDP have already held or will hold elections during year. Support for increased public spending has grown across the political spectrum in recent decades, making this year especially difficult, as empirical evidence shows that fiscal policy tends to be more lax, and deviations larger, during election years,” says the Fund. The agency estimates that deficits in election years tend to exceed forecasts by 0.4 percentage points of GDP, compared to non-election years.
This call for containment during electoral times is the main novelty of the Fiscal Monitor published this Wednesday by the IMF. Along with this, the organization insists on some of its recent messages. It calls for governments to “immediately remove” the legacies of crisis-era fiscal policy, including energy subsidies, and undertake reforms to curb rising spending, while protecting the most vulnerable.
Furthermore, it states that advanced economies with aging populations must contain pressures from health care and pension spending through entitlement reforms and other measures.
Income should keep pace with spending over time. In advanced economies, including excess profits in corporate tax could further bolster revenues, the Fund says, without elaborating on the message. Emerging and developing economies could increase their tax revenue potential by broadening tax bases, improving the design of their tax systems and strengthening revenue administration. Under ideal circumstances, these measures could generate up to an additional 9% of GDP in revenue for these economies, according to their calculations.
The IMF assures that, without new significant measures, the post-pandemic normalization of fiscal policy may remain incomplete in the coming years. It expects global public debt to approach 99% of GDP in 2029, driven by China and the United States. Furthermore, it underlines that spending pressures to address structural challenges, including demographic and ecological transitions, are increasingly pressing. To further complicate matters, slowing growth prospects and still high interest rates are likely to further restrict fiscal space in most economies.
Debt on the rise
Regarding forecasts, the IMF foresees strong imbalances in public accounts in the United States and China, the two largest economies in the world. For the United States, it estimates a public deficit of 6.5% of GDP for this year and 7.1% for next. In its economic forecast report, the IMF already warned of the unsustainability of its fiscal path. In the case of China, the imbalance would be even greater: 7.4% and 7.6% in those two years.
In Europe, the most worrying fiscal trajectories among large economies are those of France and Italy, with high deficits, low growth and high debt. For France, it foresees a deficit of 4.9% this year and next and above 4% until 2028. In the case of Italy, the deficit would be 4.6% this year and 3.2% next, for stabilize at around 3% in successive years. In both cases, the debt trajectory would go upwards. In the case of France, it would increase at a rate of almost one percentage point per year from 110.6% in 2023, until reaching 115.2% in 2029. In Italy, the gross public debt would rise from 137.3 Estimated % of 2023 up to 139.2% this year, 140.4% next year and 144.9% in 2029, where the projections end.
Germany, meanwhile, will have its accounts almost balanced and will reduce its debt from 64.3% in 2023 to 57.7% in 2029. In the case of Spain, the deficit will be around 3% both this year and the next. next five, according to the Fund, which estimates that debt will fall from 107.5% to 104.2 between 2023 and 2029, according to its calculations.