World's governments should commit to gradual but sustained debt-reduction efforts that could hurt economic growth in near-term, says IMF; advanced economies under pressure to cut debt levels that are nearing record highs

Cindy Allen

September 26, 2013 (Bloomberg LP) – Debt reduction by governments will require a “sustained commitment” to fiscal consolidation that could initially increase their debt ratios, the International Monetary Fund said in a paper released today.

The cost to economic growth could be significant in the short-term, which shows the importance of getting the pace of fiscal consolidation right and acting to mitigate the negative affect on growth, according to the paper.

“The good news is that high debt can be tamed even when growth is low,” Helge Berger, an adviser in the IMF’s European department, and Justin Tyson, a senior economist in the department, said in a blog post based on today’s paper. “The bad news is that, fiscal consolidation will likely come with an initial price of lowering growth,” they said.

“This means that, where possible, consolidation should happen gradually, supported by credible medium-term plans that help to spread the effort over time,” Berger and Tyson said. “Any measures to increase medium-term growth, such as structural reforms, should also be enacted now.”

Advanced economies are under pressure to reduce debt levels that are approaching all-time highs at a time of low economic growth, making the task more difficult. According to the IMF’s World Economic Outlook, average output growth in advanced economies between 2013 and 2018 could be almost 1.5 percentage points below the rates experienced by those economies between 1980-2007.

--Editor: Jones Hayden

To contact the reporter on this story: Ian Wishart in Brussels at iwishart@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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