Why Our World Needs Fiscal Restraint in Biggest-Ever Election Year

IMF Blog, April 17, 2024

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Canonical URL: Why Our World Needs Fiscal Restraint in Biggest-Ever Election Year

Publication date: April 17, 2024; authors: Era Dabla‑Norris, Vitor Gaspar, Marcos Poplawski‑Ribeiro, Jiae Yoo.
The global economic and financial outlook has improved in the last six months: inflation has fallen, financial conditions have eased, and risks to the outlook are balanced.
Many countries continue to struggle with high public debt and fiscal deficits amid high real interest rates and dimming medium-term growth prospects.
The April 2024 Fiscal Monitor calls for governments to avoid slippages and focus on rebuilding buffers and safeguarding fiscal sustainability over the medium term.

Fiscal policy shifted to be more expansionary last year after rapid improvement in debt and deficits in the prior two years.
Only half of the world’s economies tightened fiscal policy last year, down from about 70 percent in 2022.
Four years after the start of the pandemic, public spending, excluding interest payments, remained:
- about 3 percentage points of gross domestic product above prepandemic projections in advanced economies, excluding the United States, and
- 2 percentage points above them in emerging market economies, excluding China.
Global public debt edged up to 93 percent of GDP in 2023 and remained 9 percentage points above the prepandemic level.
The increase in global debt was led by the two largest economies, United States and China, where debt rose by over 2 and 6 percentage points of GDP respectively.
Slowing growth in China could weigh on global growth and trade; high and volatile government bond yields in the United States could tighten financing conditions globally.

In 2024, a record number of countries, home to more than half of the world’s population, are holding national elections.
Historical patterns: governments tend to spend more and tax less during election years.
Empirical finding: deficits in election years tend to exceed forecasts by 0.4 percentage points of GDP, compared to non‑election years.
Policy implication: in this great election year, governments should exercise fiscal restraint to preserve sound public finances.

Moderate fiscal tightening is expected to resume in 2024, but significant uncertainty remains.
Under current policies, primary deficits—which exclude interest expenses—will remain above debt‑stabilizing levels in 2029 in:
- about a third of advanced and emerging market economies, and
- in almost a quarter of low‑income developing countries.
The required average reduction in primary deficits is estimated at 2.1 percentage points of GDP for emerging markets with rising public debt‑to‑GDP ratios in the projections.
Without further efforts, the return of fiscal policy to its prepandemic normal may take years.

Immediately phase out legacies of crisis‑era fiscal policy, including energy subsidies.
Pursue reforms to curb rising spending while protecting the most vulnerable.
Advanced economies with aging populations should contain spending pressures for health and pensions through entitlement reforms and other measures.
Ensure revenue keeps up with spending over time:
- In advanced economies, targeting excessive profits as part of the corporate income tax system could bolster revenues.
- Emerging market and developing economies could raise tax revenue potential by broadening tax bases, improving tax design, and strengthening revenue administration.
- Such measures could, in ideal circumstances, yield as much as an additional 9 percent of GDP, according to the research.

Adopt a medium‑term approach to budgetary planning and execution to build foundations for sound and sustainable public finances.
Enhance transparency of public finances and increase use of modern technology (GovTech).
For countries in severe debt distress, orderly and timely debt restructuring is important.
Continued international cooperation—including through the Group of Twenty Common Framework and the Global Sovereign Debt Roundtable—is crucial to facilitate efficient debt restructuring processes.

Based on Chapter 1 of the April 2024 Fiscal Monitor.