IMF Urges Governments Restrain Spending to Fight Inflation

Policy makers should refrain from adopting price controls, subsidies or tax cuts for all households to cushion the effects of rising prices because such measures are costly and don’t work in the long run, the IMF said.

The IMF provided this advice along with new forecasts that total U.S. and global government debt as a share of economic output, or gross domestic product, will fall this year as pandemic assistance programs end. But the debt levels will remain higher than before Covid-19 hit the world’s economies in 2020.

Global government debt will be equivalent to 91% of the world’s GDP in 2022, sharply lower than a record 256% in 2020 but still 7.5 percentage points higher than the prepandemic level.

The U.S. is among the advanced economies that saw their annual government budget deficits and cumulative debt balloon in recent years.

U.S. combined federal, state, local and other government debt as a share of GDP climbed to 134.5% in 2020 from 108.8% in 2019, and is forecast to decline to 122.1% this year, the IMF said. The fund expects the ratio will rise gradually to 134.9% in 2027.

In comparison, the average debt-to-GDP ratio for advanced economies is 112.4% this year, and is projected to be 114% in 2027, according to the IMF.

Both rich and lower-income countries face policy dilemmas as they grapple with high inflation. Central banks are raising interest rates rapidly to slow economic growth in an effort to cool price pressures. But elected officials feel pressure to increase spending or cut taxes—which spur growth—to help households and businesses cope with rising prices, particularly for food and energy.

The IMF urged central bankers to keep raising interest rates, and discouraged broad government spending boosts or tax cuts.

“Don’t provide subsidies to the rich,” IMF Managing Director

Kristalina Georgieva

said last week. “Don’t go for blanket price controls that benefit the poor but also benefit the wealthy.”

In a rare rebuke of a rich nation, the IMF’s top economist said Tuesday that the U.K. government’s plans for tax cuts and spending increases are working against the Bank of England’s efforts to tame inflation.

“It’s like having a car with two people in the front and each of them has a steering wheel and you’re trying to steer the car in a different direction,” Pierre-Olivier Gourinchas, director of the IMF’s research department, told reporters. “That’s not going to work very well.”

U.K. Prime Minister

Liz Truss

defended her government’s proposals in the House of Commons Wednesday, saying, “As a result of our actions we will see higher growth and lower inflation.” She also told lawmakers that the BOE would have to make its own decisions about interest rates. “The way we will get higher growth is not through higher taxes.”

Other countries around the world have introduced measures such as energy subsidies, reduced sales taxes and lower customs duties this year to help offset rising prices, the fund said.

Most of these measures, studied by the IMF in its survey of more than 700 policy steps to respond to inflation, “have not been targeted at those most in need,” said

Vítor Gaspar,

director of the IMF’s fiscal affairs department.

These policy debates come as many governments grapple with ebbing economic growth and rising debt service costs.

The global economy will expand 2.7% in 2023, down from 3.2% this year and 6% in 2021, with inflation, the war in Ukraine, and China’s slowdown putting downward pressure, the IMF said Tuesday. The new forecast represents a reduction of 0.2 percentage point from the fund’s July estimate.

The IMF said many governments should reduce their budget deficits to help tackle inflation and ease their debt burdens. To do so, they may need to raise additional revenues and curb spending growth, including public wages, the fund said.

The U.S. federal government budget deficit declined by roughly half to $1.4 trillion in the fiscal year that ended Sept. 30, compared with the year before, as tax revenue increased and pandemic-related spending fell sharply, the nonpartisan Congressional Budget Office said Tuesday.

Write to Yuka Hayashi at [email protected]