The IMF warns about the risk of higher public spending in the ‘Great Election Year’

Governments tend to turn on the public spending tap during election times. And 2024 is the election year par excellence, when a record number of countries that are home to more than half of the world’s population have a date with the ballot boxes to elect their representatives. The International Monetary Fund (IMF) fears that budget deficits will deviate from target at a time when public finances are not yet healthy, and it is asking governments for fiscal moderation. The IMF is also asking for taxes on excessive corporate profits and reforms to contain spending on healthcare and pensions.

The IMF is concerned about the impact that the pandemic and the recent inflationary process have had on public finances. Four years after the Covid outbreak, fiscal deficits and debt levels are higher than pre-pandemic forecasts had expected. Rising interest rates have also raised interest expenses, while government spending on social benefits, subsidies and money transfers have expanded in response to the pandemic and commodity price shocks. And now, there is a long list of elections.

“The risks of fiscal slippages are particularly acute given that 2024 is what is being called the ‘Great Election Year’: 88 economies or economic areas representing more than half of the world’s population and GDP have already held or will hold elections during the year,” says the Fund in its Fiscal Monitor report, published on Wednesday. “Support for increased government spending has grown across the political spectrum over the past several decades, making this year especially challenging, as empirical evidence shows that fiscal policy tends to be looser, and slippages larger, during election years.” The international organization estimates that deficits in election years tend to exceed forecasts by 0.4 percentage points of GDP, compared to non-election years.

This call for containment during electoral times is the main novelty of the report, but the IMF also insists on some of its other recent messages. It calls for governments to “immediately terminate” the legacies of crisis-era fiscal policy, including energy subsidies, and undertake reforms to curb rising spending, while protecting the most vulnerable members of society.

Furthermore, it states that advanced economies with aging populations must contain pressures from health care and pension spending through entitlement reforms and other measures.

Income should keep pace with spending over time. In advanced economies, including excess profits in corporate tax could further bolster revenues, the Fund says, without elaborating. Emerging and developing economies could increase their tax revenue potential by expanding tax bases, upgrading their tax systems and enhancing institutional capacity. Under ideal circumstances, these measures could generate up to an additional 9% of GDP in revenue for these economies, according to their calculations.

The IMF cautions that, without significant measures, the post-pandemic normalization of fiscal policy may remain incomplete in the coming years. It expects global public debt to approach 99% of GDP in 2029, driven by China and the United States. Furthermore, it underlines that spending pressures to address structural challenges, including demographic and ecological transitions, are increasingly pressing. To further complicate matters, slowing growth prospects and persistently high interest rates are likely to further restrict fiscal space in most economies.

Debt on the rise

Regarding forecasts, the IMF foresees strong imbalances in public finances in the United States and China, the two largest economies in the world. For the United States, it estimates a public deficit of 6.5% of GDP for this year and 7.1% for next. In its economic forecast report, the IMF already warned of the unsustainability of the country’s fiscal path. In the case of China, the imbalance would be even greater: 7.4% and 7.6% in those two years.

In Europe, the most worrying fiscal trajectories among large economies are those of France and Italy, with high deficits, low growth and high debt. For France, the IMF foresees a deficit of 4.9% this year and next and above 4% until 2028. In the case of Italy, the deficit would be 4.6% this year and 3.2% the next, stabilizing at around 3% in successive years. In both cases, the debt trajectory would go upwards. In the case of France, it would increase at a rate of almost one percentage point per year from 110.6% in 2023, to reach 115.2% in 2029. In Italy, gross public debt would rise from an estimated 137.3% in 2023 up to 139.2% this year, 140.4% next year and 144.9% in 2029, where the projections end.

Germany, meanwhile, will have nearly balanced accounts and will reduce its debt from 64.3% in 2023 to 57.7% in 2029. In the case of Spain, the deficit will be around 3% both this year and the five years, according to the Fund, which estimates that debt will fall from 107.5% to 104.25 between 2023 and 2029.

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