IMF says developed nations must curb their deficits

Image caption,
The IMF has renewed its warning that countries must be tough on spending

The International Monetary Fund (IMF) has warned developed nations they face an "urgent" need to cut their budget deficits.

Its warning comes as a slew of European countries face public unrest over their attempts to do just that.

In its latest Fiscal Monitor report, it said failure to do so would harm the nations' economic recovery.

The IMF said current policies could end in average debt ratios of 110% of gross domestic product (gdp) by 2015.

It said: "As economies gradually recover, it is now urgent to start putting in place measures to ensure that the increase in deficits and debts resulting from the crisis... does not lead to fiscal sustainability problems.

"If public debt is not lowered to pre-crisis levels, potential growth in advanced economies could decline by over half a per cent annually, a very sizable effect when cumulated over several years."

One suggestion made by the organisation is to tighten up on VAT by removing exemptions on items such as books, childrens' clothes and food. - something that is likely to prove unpopular in the UK.

But the IMF says by doing this, the UK could raise revenue worth 3.3% of gdp without having to raise the actual rate of VAT.

It says the UK is on course for one of the biggest increases in debt over the next 20 years of any of the world's rich economies.

Drastic measures

Greece - at the centre of the euro zone crisis - is trying to introduce drastic cost-cutting measures to curb its debt, including a 5% pay cut for public sector workers from June, and a pay freeze from 2011.

Pensions, except for the poorest, will also be frozen in 2011.

These proposals have caused mass protests and riots in the country.

Greece's deficit for this year is estimated by the IMF at 8.1% of gdp.

Other countries have far worse deficits, for example Ireland's is estimated at 12.2%, the UK's at 11.4% and the US's at 11.0% of gdp.

These countries are less of a worry though as their economies are either more productive than Greece's, or, in Ireland's case, as perceived as being satisfactorily committed to combat ting the problem.

The IMF's warning echoes comments it made a month ago, when it said recovery in many advanced economies remained "tepid" and that high government debt levels needed to be addressed.

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