IMF calls for ‘more automatism’ in public spending

Gita Gopinath, Chief Economist, International Monetary Fund (IMF), speaking in the Press Conference: IMF World Economic Outlook Update session at the World Economic Forum Annual Meeting 2020 in Davos-Klosters, Switzerland, 22 January. [World Economic Forum/ Greg Beadle]

As monetary policy nears its limits to lift the world’s sluggish economy, the International Monetary Fund told governments on Tuesday (21 January) to introduce “more automatism” in their fiscal rules in order to counter the economic slowdown.

The Fund’s recommendation, made at the World Economic Forum in Davos (Switzerland), came as the European Commission is about to launch a consultation among member states to review the Stability and Growth Pact, the EU’s fiscal rules.

Central banks became the engines of growth over the past years, playing a vital role in averting a global recession. 

According to the IMF’s estimate, monetary easing added 0.5% to global growth via 71 rate cuts by 49 central banks. 

IMF warns EU-US tensions could impact global growth 

Some “tentative signs of stabilisation” are appearing in the global economy, but despite the positive news the EU-US trade dispute represents a risk to the global output, the IMF warned on Tuesday (20 January).

However, the global economy is still “sluggish” and the slowdown has not reached yet a “turning point”, the IMF said.

Against this backdrop, the Fund called on countries not only to invest more, but to amend their fiscal rules in order to allow more automatic investments in areas like education or infrastructure in good economic times.

Speaking at the World Economic Forum on Tuesday, the IMF’s chief economist, Gita Gopinath, recommended introducing “more automatism” in national expenditure to relaunch national economies.

“Now it will be a good time to think about more cyclical rules,” Gopinath said.

The official later clarified to EURACTIV that the IMF’s goal is not to encourage procyclical rules that aggravate austerity cuts in times of recession. This was the case for example in Greece, where the IMF has been accused of making the recession worse by requesting drastic cuts in public spending. Instead, her proposal is about modifying fiscal rules so that they become more responsive to changes in the economic cycle.

The Fund’s proposal came days before the Commission’s consultation to review the Stability and Growth Pact.

The aim is to simplify the rules, the Commission explained. However, the EU’s economic commissioner, Paolo Gentiloni, backs the idea of easing fiscal rules to favour some ‘green’ investment.

Brussels lowers expectations about ‘green’ overhaul of Stability and Growth Pact

The European Commission is cautious about loosening EU fiscal rules in order to incentivise ‘green’ investment by member states. Valdis Dombrovskis, the Commission Vice-President for the economy, said on Tuesday (17 December) he wants to avoid “divisive” issues.

The Fund however warned that not all countries have the same margin to open their wallets, especially in Europe. In line with the European Commission, the Fund again called on Germany and the Netherlands to increase spending, especially on infrastructure and education. 

The eurozone’s ultra-low interest rates are an opportunity for Berlin and The Hague to increase public spending at low cost, something the European Commission and the European Fiscal Board have already insisted on.

The space to increase spending is however much more limited for countries with high debt rates, Gopinath warned, alluding to countries like Italy, Portugal, Belgium or France.

The US is the rara avis among the countries with unbalanced public accounts. Despite having a deficit of around 4.5%, the country finds no difficulties to finance itself, even at times of economic trouble. 

“Even with high deficits, when things go wrong people always go back to the US Treasury,” Gopinath remarked, saying this “partly reflects the dominance of the dollar in the global economy.”

Von der Leyen and Trump fine tune transatlantic relations in Davos

European Commission president Ursula Von der Leyen met US President Donald Trump in Davos on Tuesday (21 January) and vowed to move forward the transatlantic agenda after a period of tense relations and trade threats between the two allies.

Trump’s chief economic advisor, Larry Kudlow, also joined calls to increase fiscal spending, rather than intervention by central banks, in line with his boss’s expectations from the US  Federal Reserve.

Kudlow recommended “to my European friends” to slash taxes and deregulate their economies in order to boost growth, instead of waiting for a “miracle” from their central banks.

“Don’t worry” if the deficit goes above 5% of GDP, he said on the same panel, because it will be reduced if the economy grows. 

“Regulatory reforms are very underrated as fiscal tool,” he said.

[Edited by Frédéric Simon]

Subscribe to our newsletters

Subscribe
Contribute