Governments should take advantage of strong growth to consolidate their finances, says IMF.
In a new report, the International Monetary Fund has advised governments to take advantage of current strong economic growth to consolidate their finances, insisting that risks to global financial stability have increased.
On government finances, the IMF says “decisive action is needed now” while growth is strong. It argues that by improving their finances today, governments will have more scope to use tax cuts or increases in public spending to combat future downturns.
It also means they would be less likely to have difficulty borrowing the money they need when their economies weaken.
The good news is that the IMF’s assessment of the general economic outlook, published earlier this month, was quite upbeat for the near term.
It also says that the banking sector has become more resilient since the global financial crisis.
Yet in two additional reports, it cited the stability of the financial system and the current state of government finances around the world as risks in the medium to long term.
Notably, the IMF appeared to criticize the Donald Trump administration which is embarking on tax cuts at a time when the organization judges the U.S. economy to be close to full employment.
The IMF recommends that policy in the U.S. “should be re-calibrated to ensure that the government debt-to-GDP ratio declines over the medium term.”
There was also a warning about the risk of global financial instability, which is partly, though not only, about rising government debts.
Rising inflation and central banks’ responses with higher interest rates could aggravate debt problems and could also hit the prices of financial assets, the IMF said.
The IMF warned that the large scale and opaque nature of the financial system in China poses a particular risk to stability, although also noted that Chinese banks have reduced their use of risky short-term borrowing in response to tighter regulation.
The report judges that the global banking system is stronger now than it was at the time of the 2008 global crisis, but adds that reforms need to continue.
One encouraging point is the IMF’s view that crypto-assets, such as Bitcoin, do not currently appear to pose any risk to financial stability, but they could do if they were to become more widely used.
Interestingly, it added that the technology behind these assets has the potential to make financial markets work more efficiently in the future.