IMF: Reduce public debt. In Europe, social spending will have to make way for defence spending

Countries with high levels of public debt, particularly the major advanced economies, must get their finances in order as soon as possible, because delaying this will only lead to even more painful measures. The International Monetary Fund reiterates its analysis in a statement signed by the head of the Fiscal Affairs Department, Rodrigo Valdes, and his deputy, Era Dabla-Norris.

Reducing public spending, cutting deficits and lowering debt levels is the only way to prevent a rise in government bond yields, which puts further pressure on public finances. However, the various overlapping crises are pushing in the opposite direction; thus, ‘most countries are considering increasing spending rather than tightening their belts’, emphasised Valdes at a press conference in Bangkok, where the annual meetings of the IMF and the World Bank are currently taking place.

Furthermore, in Europe, the new rearmament requirements arising from conflicts cannot always be financed through borrowing: sooner or later, other areas of social spending will have to be cut. “The debate on the social contract underpinning public spending is a matter of great urgency; spending will have to adapt,” said Valdés, in response to a question about the UK, which also applies to other European countries.

‘Defence spending will be an ongoing cost; it will not be possible to finance it indefinitely through debt.’ And raising taxes does not seem to be an option, given that the tax burden in Europe is already high: ‘It is not easy to find scope for a significant increase in revenue. Ultimately, this leads to distortions,” said Valdes.

Deputy Director Dabla-Norris added that governments faced with increased defence spending will have to explain to the public that ‘there will be difficult choices to make’.