IMF Improves Economic Outlook But Warns of Spiraling Public Debt

Chris Gaetano
Published Date:
Oct 14, 2020
The International Monetary Fund (IMF) has adjusted its growth projections, now believing that the pandemic's economic damage will be a little less dire than initially thought, but it warned that the same measures that nations have used to combat the pandemic and its attendant economic chaos are also fueling massive increases in public debt that could threaten the recovery down the road.

As stated in its October World Economic Outlook report, the organization now believes that the year 2020 will see global growth contract by 4.4 percent, slightly less than the 4.9 percent reduction it was projecting in June. This was attributed to activity beginning to improve sooner than expected after lockdowns were scaled back in May and June, as well as indicators of a stronger recovery in the third quarter. At the same time, the IMF also adjusted its projections for 2021 slightly downward, from 5.4 percent growth to 5.2 percent, owing to the more moderate downturn projected for 2020 and consistent with expectations of persistent social distancing. In its report, the IMF says,  "Following the contraction in 2020 and recovery in 2021, the level of global GDP in 2021 is expected to be a modest 0.6 percent above that of 2019. The growth projections imply wide negative output gaps and elevated unemployment rates this year and in 2021 across both advanced and emerging market economies."

The IMF also pointed out, however, that governments globally have spent $12 trillion on pandemic-related measures; while the IMF said "these lifelines have saved lives and livelihoods," it also said in its blog, "they are costly and, together with sharp falls in tax revenues owing to the recession, they have pushed global public debt to an all-time high of close to 100 percent of GDP." Despite this cost, the IMF said that this is still no time to cut back on aid, as 80‑90 million people are likely to fall into extreme poverty in 2020 as a result of the pandemic. High debt levels, though, restrict countries' ability to finance such measures, as is already seen in highly-indebted countries in emerging markets. Therefore, "many countries will need to do more with less, given increasingly tight budget constraints."

The fund recommended that governments gradually shift priorities from protecting existing jobs to creating new ones. It also recommended that they adopt measures to improve tax compliance and consider higher taxes for the more affluent groups and highly profitable firms.

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