According to the IMF, austerity measures are not inevitable to reduce the impact of the pandemic on public finances

According to the IMF, austerity measures are not inevitable to reduce the impact of the pandemic on public finances

Most advanced economies that are free to borrow do not need to budget for austerity to restore public finances to health after the coronavirus pandemic, the IMF said a decade ago in a reversal of its recommendations.

Countries that have the option of continuing to borrow should be able to stabilize their national debt by the middle of the decade without having to raise taxes or cut public spending plans, Vitor Gaspar, the fund's chief financial officer, told the Financial Times.

However, countries with limited access to financial markets need to be much more cautious in their financial strategies, he warned in an interview accompanying the release of the fund's annual financial monitor.

Global public debt is likely to hit a record high of nearly 100 percent of global gross domestic product in 2020, and the IMF predicts that public debt in most advanced economies will grow significantly this year as a percentage of national income.

However, by 2025, headline deficits will match the level the IMF forecast before the pandemic, with no public spending cuts or tax increases required.

Covid-19 is a one-off spike in debt, and when interest rates are low, debt dynamics stabilize

The key factor in this outlook for most advanced economies is the cost of borrowing. The IMF assumes that the cost of servicing government debt will remain well below the growth rate these countries are likely to achieve.

This would allow for cheaper borrowing to largely offset the weaker growth and lower tax revenues the fund is forecasting due to the crisis.

By 2025, most advanced countries would "have a higher cyclically adjusted primary deficit, but this will be largely offset by lower interest payments," Gaspar said.

As a result, there is no need for fiscal consolidation in countries that can borrow freely from financial markets, he added. "The [national debt] ratio in our forecasts is stabilizing and even decreasing slightly towards the end of our forecasts, which shows that Covid-19 is a one-off increase in debt and that debt dynamics stabilize at low interest rates."

The IMF's words are being taken up in the US and across Europe to give countries the green light to invest out of recession rather than tightening their belts as has been the case for the last decade.

The Fund's advice is a reversal of the message given in the same publication a decade ago at the appropriate stage of the financial crisis. Then it warned that "many countries will have major cuts in the future".

The Fund's internal auditor then found that it had advocated austerity too quickly in 2010/11 and the IMF has now fundamentally revised its guidelines.

This time more needs to be done to foster a strong recovery before considering the health of countries' public finances, the IMF stressed.

“We believe there is a risk that fiscal support will be withdrawn prematurely and, given the choice, policymakers would be wise to take a very phased approach and maintain fiscal support until the recovery is on solid foundations and the long term Scar effects from Covid 19 are seen as under control, "said Gaspar.

The favorable debt projections are based on a strong recovery in economic growth after the pandemic, and interest rates remain well below growth rates. This combination is not guaranteed and Mr Gaspar stressed that the uncertainty about the budget projections is still extremely high.

In addition, emerging economies, which do not have that much credit, face “binding financial constraints” and must carefully weigh the costs and benefits of additional financial assistance during the Covid-19 crisis, the IMF said.

The fund highlighted China and the US as countries that were unlikely to stabilize their national debt by the middle of the decade, given that they had big plans for public spending and few plans for tax hikes.