MaximsNewsNetwork: IMF - WORLD ECONOMIC OUTLOOK - ADVANCED ECONOMIES TO CUT DEFICITS, RAISE TAXES

MaximsNewsNetwork: 03 October 2010 -- A new report by the International Monetary Fund (IMF) finds that almost all advanced economies will need to cut deficits and raise taxes to put their fiscal positions back on a sustainable footing in the coming years; analysis in a chapter of the IMF's latest World Economic Outlook shows that initially fiscal retrenchment typically has contractionary short-term effects on economic activity, with lower output and higher unemployment. "What we are trying to do is to inform the public about both the benefits and the cost. Benefits are the long-term. I think it's very important for us to spread the message that consolidation is necessary. It's like when you have large fiscal deficit, it's like family that is constantly spending more than it earns. It cannot go on forever, right? And it does have its cost. The chapter has some information on the cost such behavior has. I think that's the role we have to play. But we should also have to be clear that there is short-term pain. That is why they are concerned at this stage. But if we have a good assessment of the long-term gains then we hope that this will help to carry forward the debate in Europe," said Jorg Decressin, the Assistant Director of the Research Department at the IMF. "Fiscal contractions, fiscal consolidation, typically reduce growth and increase unemployment rate in the short-term. 1% of GDP in budget deficit cut reduces GDP by half percent and raises the unemployment rate by 1/3 of percentage point within 2 years," said the report's lead author Daniel Leigh. A number of factors usually soften the short-term impact of fiscal consolidation. Using a new data set, the authors show that central banks usually cut interest rates and the currency falls in value. This helps cushion the impact on consumption and investment, and boosts exports. Second, fiscal consolidation is less costly when markets are more concerned about fiscal sustainability. Third, consolidations based on spending cuts are less painful than those based on tax hikes. This is largely because central banks cut interest rates more after spending cuts. "Tax versus spending cuts. It turns out that the government that cut spending experiences smaller contractions than those that raise taxes. We found interesting reasons for that. Central banks typically cut interest rates more following spending cuts. That's the fact that changes the outcome," Leigh said. The findings suggest that in today's environment, fiscal consolidation is likely to have more negative short-term effects than usual. "It's important to have realistic expectations. Almost all advanced economies need to have fiscal consolidation, and it's going to have long-run benefits. But we shouldn't kid ourselves. In the short-term, tax hikes and spending cuts are going to probably reduce growth and raise the unemployment rates," said Leigh. In a second report released Thursday, the IMF said that trade is rebounding from the recent recession, but has not yet fully recovered the ground lost during the global economic crisis. This is particularly the case in economies that were hit by a banking crisis, the IMF says in an analysis of how trade was affected. "To help us understand where trade might be headed from here, what the WEO chapter does is look at what happed to trade following banking and debt crisis over the past 40 years. And what we found was imports of crisis countries tend to fall substantially in the first 2 years of crisis, very much like what we saw in the recent global downturn. We also found that imports do not recover quickly after those first years. In fact, what tends to happen is that imports stay depressed in the medium term," said lead author Abdul Abiad. Trade is rebounding from the recent recession, but has not yet fully recovered the ground lost during the global economic crisis. This is particularly the case in economies that were hit by a banking crisis, the IMF says in an analysis of how trade was affected. ...... ( INTERNATIONAL MONETARY FUND: IMF ) ............................................ MaximsNewsNetwork: News Network for the United Nations and the International Community. See: http://www.MaximsNews.com. "GIVING POWER & RESONANCE TO THE VOICE OF THE INTERNATIONAL COMMUNITY" ......................