Can government spending meet expectations?

 •  Filed under fiscal policy and taxation, inequality, Own charts

New demands and expectations

The latest Fiscal Monitor report warns that more will be expected from fiscal actions in the future:

The global economy is undergoing major transformations, including a productivity slowdown, technological change, and global economic integration. This creates new demands for public policies to facilitate these transformations, while cushioning the effect on those negatively affected.

One could be skeptical about such framing. It is welcome that the IMF explains why smart spending could help workers "fully participate in and adapt to a changing economy" and makes the case that "access to education, training, and health services, as well as social insurance, can make it easier for workers to bounce back from a job loss or illness."

But just because experts start gravitating more toward the view that "fiscal policy should promote inclusion" does not mean that it will happen any time soon.

Projections

Last year (in early 2016), the IMF predicted that public debt would be lower than overall GDP in advanced economies within a couple of years.

According to new projections, that will not happen: debt will be larger than 100% of GDP in rich countries until at least 2022:


About a year ago, my PIIE colleagues and I posted this chart, showing that structural deficits in advanced economies were roughly flat:

In other words, the neutral fiscal stance is not leading to lower debt ratios.

The main reason is slow economic growth: and it is noteworthy that debt projections are becoming more pessimistic despite the fact that GDP projections have been adjusted slightly upward.

The latest WEO is titled, perhaps ambitiously, "Gaining Momentum?"; here is the summary:

Global economic activity is picking up with a long-awaited cyclical recovery in investment, manufacturing, and trade ... World growth is expected to rise from 3.1 percent in 2016 to 3.5 percent in 2017 and 3.6 percent in 2018. Stronger activity, expectations of more robust global demand, reduced deflationary pressures, and optimistic financial markets are all upside developments.