IMF calls for fiscal restraint in year with most elections ever

IMF's global caution: In its latest Fiscal Monitor publication, the International Monetary Fund (IMF) has issued a stern warning to nations worldwide, urging them to exercise fiscal restraint amidst what has been dubbed the "Great Election Year" of 2024. With a staggering 88 countries, representing over half of the global population, undergoing or preparing for national elections this year, the IMF underscores the inherent fiscal risks associated with such democratic processes.

Historically, election years have witnessed governments loosening their purse strings, often indulging in increased spending and reduced taxation in a bid to woo voters. The IMF highlights the likelihood of budget overruns during such periods, exacerbated by heightened demands for social spending. According to the report, deficits during election years typically surpass initial forecasts by 0.4 percentage points of GDP compared to non-election years.

Compounding these fiscal challenges are sluggish growth prospects and persistently high interest rates across many economies, further constricting fiscal maneuverability. While the IMF projects global real GDP growth to maintain a steady trajectory at 3.2 per cent for both 2024 and 2025, it cautions that many countries continue to grapple with elevated debt levels and fiscal deficits amid dimming medium-term growth prospects.

Advanced economies, excluding the United States, are depicted as still spending 3 percentage points more than pre-pandemic levels, while emerging markets, excluding China, have increased spending by 2 percentage points. Global public debt, a key concern for policymakers, has edged up to 93 per cent of GDP in 2023, representing a significant uptick from pre-pandemic levels.

In light of these challenges, the IMF advocates for a strategic unwinding of pandemic-era support measures and a concerted effort to rebuild fiscal buffers, particularly in nations facing heightened sovereign risks. Governments are urged to phase out crisis-era fiscal policies, including energy subsidies, while simultaneously pursuing reforms aimed at curbing expenditure growth while safeguarding vulnerable populations.

For advanced economies grappling with aging populations, the IMF recommends comprehensive reforms to health and pension programs to mitigate spending pressures. Additionally, measures to bolster revenue streams, such as targeting excessive corporate profits within the tax system, are proposed as viable avenues for fiscal sustainability.

In the realm of emerging market economies and developing nations, the IMF emphasises the importance of enhancing tax systems, broadening tax bases, and fortifying institutional capacities. Such reforms, it argues, have the potential to unlock additional tax revenue equivalent to as much as 9 per cent of GDP, thereby shoring up fiscal resilience.

However, the IMF cautions that without decisive efforts to rein in deficits, global public debt is projected to soar, nearing 99 per cent of GDP by 2029. Notably, this trajectory is driven primarily by escalating debt levels in China and the United States, surpassing historical peaks. In light of these projections, policymakers are urged to prioritize fiscal discipline and enact prudent fiscal policies to navigate the challenges posed by the current economic landscape.