There is a longstanding jibe that IMF stands not for International Monetary Fund, but rather for “it’s mostly fiscal”. That epithet has seemed less generally apposite for a while. Of course, the fund has continued to complain about fiscal incontinence in crisis-hit countries, such as Greece or Argentina. But, in its broader surveillance, it has been relatively relaxed about fiscal policy since the financial crisis. That, however, was the world of “low for long” or even “lower for longer”. This is no longer the world in which we live. The fund has duly changed. Gita Gopinath, first deputy managing director, has sounded the alarm, calling “for a renewed focus on fiscal policy, and with it, a reset in fiscal policy thinking”. The IMF has become “mostly fiscal” again.
It is unquestionable that public debt has reached high levels by past standards. An update of an IMF chart published in 2020 shows the ratio of public debt to gross domestic product of high-income countries at 112 per cent in 2023, down from a recent peak of 124 per cent in 2020. The latter matched the previous peak reached in 1946. What makes this even more remarkable is that the earlier peak occurred after the second world war, while this latest peak occurred in peacetime. Furthermore, the ratio for emerging economies has reached 69 per cent of GDP, a record for these countries. (See charts.)
So, is public debt disaster looming? If so, will there be defaults, inflation, financial repression (forcible attempts to keep debt cheap), or some combination of all three? If none of these is to happen, what must be done?